1. © IFP OIL MARKET VOLATILITY : AN ECONOMETRIC ANALYSIS OF THE INTERACTIONS BETWEEN THE CRUDE OIL MARKET, THE GAS OIL AND THE GASOLINE MARKETS Frederic LANTZ, IFP-School, Emmanuel HACHE, IFP-School, Chris IOANNIDIS, University of Bath

2. © IFP Analysis of interactions between prices: introduction (1) The crude oil prices and the oil product prices are on related market through the refining industry The oil product are obtained by blending sereval intermediate products from the processing units The products have to reach several specifications (sulphur content, etc.) The quality of the intermediate products are depending on the crude oil quality (API degree, sulphur content)

3. © IFP Analysis of interactions between prices: introduction (2) Some important changes have occured in the refining industry due to the changes in the demand both in quantity and in quality term (specification of the oil products). The refining margins become more and more volatile Figure - Refining margins (US market)

4. © IFP Spot and future prices of heating oil, gasoline and WTI (North American market)

5. © IFP Descriptive statistics 2006-2011 The volatility is more important for the WTI and the Heating oil prices than for the gasoline price on the spot market.

6. © IFP Cointegration analysis between spot prices (in log term) Cointegration test (Johansen) Long term equilibrium : VECM : the coefficient of the callback forces are quite Low (-0.09)

7. © IFP Cointegration analysis between future prices (in log term) Cointegration test (Johansen) Long term equilibrium : Thus, there is more volatility for future prices equilibrium than for the spot prices VECM : the coefficient of the callback forces are quite low (between -0.07 and -0.09)

8. © IFP Granger Causality tests On the spot market, the gasoline price «Granger cause » the WTI price. However, the future prices have a mutual influence the one on the other one.

9. © IFP Cointegration analysis between gasoline spot and future prices Long term equilibrium : However, the ARCH test is significant which denotes some changes of volatility over the period.

10. © IFP Cointegration analysis betweenWTI spot and future prices Long term equlibrium : A Markov switching vector error correction model (MSVECM) has been estimated and two short run dynamics have been determined : - standard regime (most frequent) - tension regime (9/11, gulf war, summer 2008)

11. © IFP Conclusion (1) Three equilibrium categories exist in the oil market : – Between spot & futures prices – Between crude oil & petroleum products – Between both of them On the spot market, the hypothesis of the leading role of the gasoline price could not be rejected in the North American Market On the futures market we can not observ a « price leader »

12. © IFP Conclusion (2) But, due to the evolution of the demand and of the refining industry, market tensions could explain the short term dynamic of the prices (volatility) The high volatility of crude oil prices in tension period could be explained by the uncertainties on the crude oil needs in term of quantity and quality