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Analyzing the dynamics of the refining margin: implications for valuation and hedging

Author

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  • Andr�s Garc�a Mirantes
  • Javier Población
  • Gregorio Serna

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 analyzed, and we find that assuming a common long-term trend for crude oil, heating oil and gasoline is the most accurate approach to hedging.

Suggested Citation

  • Andr�s Garc�a Mirantes & Javier Población & Gregorio Serna, 2012. "Analyzing the dynamics of the refining margin: implications for valuation and hedging," Quantitative Finance, Taylor & Francis Journals, vol. 12(12), pages 1839-1855, December.
    • Handle: RePEc:taf:quantf:v:12:y:2012:i:12:p:1839-1855
    DOI: 10.1080/14697688.2012.708430
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    1. Población, Javier & Serna, Gregorio, 2016. "Is the refining margin stationary?," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 169-186.
    2. Javier Población & Gregorio Serna, 2018. "A common long-term trend for bulk shipping prices," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 20(3), pages 421-432, September.
    3. Polanco Martínez, Josué M. & Abadie, Luis M. & Fernández-Macho, J., 2018. "A multi-resolution and multivariate analysis of the dynamic relationships between crude oil and petroleum-product prices," Applied Energy, Elsevier, vol. 228(C), pages 1550-1560.
    4. Andrés Mirantes & Javier Población & Gregorio Serna, 2015. "Commodity derivative valuation under a factor model with time-varying market prices of risk," Review of Derivatives Research, Springer, vol. 18(1), pages 75-93, April.
    5. You-How Go & Wee-Yeap Lau, 2019. "Palm oil spot-futures relation: Evidence from unrefined and refined products," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 65(3), pages 133-142.
    6. Javier Población & Gregorio Serna, 2021. "Measuring bulk shipping prices risk," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 23(2), pages 291-309, June.

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