ABSTRACT
It is well known that the prices of crude oil and its primary refined products (i.e. heating oil and gasoline) are cointegrated. In this paper, we extend this empirical evidence by showing that the refining margin is stationary and therefore, exhibits different dynamics from crude oil or its primary refined products. Furthermore, we show that crude oil, heating oil and gasoline are not only cointegrated but also share common long-term dynamics. This finding has crucial implications in terms of managing and hedging the risk faced by refining companies because the common long-term trend finding implies that the refining margin risk only reflects short-term effects. Specifically, in this paper, a way to hedge the refining margin with crack-spread options is analysed, and we find that assuming a common long-term trend for crude oil, heating oil and gasoline is the most accurate approach to hedging.
