Skip to main content


  • Christiane Baumeister (a1), Lutz Kilian (a2) and Xiaoqing Zhou (a2)

Many oil industry analysts believe that there is predictive power in the product spread, defined as the difference between suitably weighted refined product market prices and the price of crude oil. We derive a number of alternative forecasting model specifications based on product spreads and compare the implied forecasts to the no-change forecast of the real price of oil. We show that not all product spread models are useful for out-of-sample forecasting, but some models are, even at horizons between one and two years. The most accurate model is a time-varying parameter model of gasoline and heating oil spot price spreads that allows for structural change in product markets. We document mean-squared prediction error reductions as high as 20% and directional accuracy as high as 63% at the two-year horizon, making product spread models a good complement to forecasting models based on economic fundamentals, which work best at short horizons.

Corresponding author
Address correspondence to: Lutz Kilian, Department of Economics, University of Michigan, 309 Lorch Hall, Ann Arbor, MI 48109-1220, USA; e-mail:
Hide All

We thank Ron Alquist, Bahattin Büyüksahin, Barbara Rossi, Philip K. Verleger, and Jonathan Wright for helpful comments. Jamshid Mavalwalla provided excellent research assistance.

Hide All
Alquist Ron and Kilian Lutz (2010) What do we learn from the price of crude oil futures? Journal of Applied Econometrics 25, 539573.
Alquist Ron, Kilian Lutz, and Vigfusson Robert J. (2013) Forecasting the price of oil. In Elliott Graham and Timmermann Allan (eds.), Handbook of Economic Forecasting, vol. 2, pp. 427507. Amsterdam: North-Holland.
Baumeister Christiane, Guérin Pierre, and Kilian Lutz (2015) Do high-frequency financial data help forecast oil prices? The MIDAS touch at work. International Journal of Forecasting 31, 238252.
Baumeister Christiane and Kilian Lutz (2012) Real-time forecasts of the real price of oil. Journal of Business and Economic Statistics 30, 326336.
Baumeister Christiane and Kilian Lutz (2014a) Real-time analysis of oil price risks using forecast scenarios. IMF Economic Review 62, 119145.
Baumeister Christiane and Kilian Lutz (2014b) What central bankers need to know about forecasting oil prices. International Economic Review 55, 869889.
Baumeister Christiane and Kilian Lutz (2015) Forecasting the real price of oil in a changing world: A forecast combination approach. Journal of Business and Economic Statistics 33, 338351.
Baumeister Christiane, Kilian Lutz, and Lee Thomas K. (2014) Are there gains from pooling real-time oil price forecasts? Energy Economics 46, S33S43.
Bernard Jean-Thomas, Khalaf Lynda, Kichian Maral, and Yelou Clement (in press) Oil price forecasts for the long term: Expert outlooks, models, or both? Macroeconomics Dynamics.
Brown Stephen P. A. and Virmani Raghav (2007) What's driving gasoline prices? Economic Letter. 2, 18.
Chen Yu-Chin, Rogoff Kenneth S., and Rossi Barbara (2010) Can exchange rates forecast commodity prices? Quarterly Journal of Economics 125, 11451194.
Chicago Mercantile Exchange (2012) Introduction to crack spreads. In Crack Spread Handbook. Chicago, IL: The CME Group. Available at:
Clark Todd E. and McCracken Michael W. (2009) Tests of equal predictive ability with real-time data. Journal of Business and Economic Statistics 27, 441454.
Clark Todd E. and West Kenneth D. (2007) Approximately normal tests for equal predictive accuracy in nested models. Journal of Econometrics 138, 291311.
Diebold Francis X. and Mariano Roberto S. (1995) Comparing predictive accuracy. Journal of Business and Economic Statistics 13, 253263.
Diebold Francis X. and Pauly Peter (1987) Structural change and the combination of forecasts. Journal of Forecasting 6, 2140.
Evans Beth (2009) Oil Market ‘Teetering on the Edge’, Warns Verleger. Available at:, last accessed September 28.
Faust Jon and Wright Jonathan H. (2013) Forecasting inflation. In Elliott Graham and Timmermann Allan (eds.), Handbook of Economic Forecasting, vol. 2, pp. 356. Amsterdam: North-Holland.
Haigh Michael S. and Holt Matthew (2002) Crack spread hedging: Accounting for time-varying volatility spillovers in the energy futures markets. Journal of Applied Econometrics 17, 269289.
Inoue Atsushi and Kilian Lutz (2004) In-sample or out-of-sample tests of predictability: Which one Should we use? Econometric Reviews 23, 371402.
Kilian Lutz (1999) Exchange rates and monetary fundamentals: What do we learn from long-horizon regressions? Journal of Applied Econometrics 14, 491510.
Kilian Lutz (2010) Explaining fluctuations in U.S. gasoline prices: A joint model of the global crude oil market and the U.S. retail gasoline market. Energy Journal 31, 87104.
Kilian Lutz (2015) Comment on Francis X. Diebold's ‘Comparing predictive accuracy, twenty years later: A personal perspective on the use and abuse of Diebold-Mariano tests’. Journal of Business and Economic Statistics 33, 1317.
Kilian L. (2016) The impact of the shale oil revolution on U.S. oil and gas prices. Review of Environmental Economics and Policy 10, 185205.
Kim Chang-Jin and Nelson Charles R. (1999) State Space Models with Regime Switching: Classical and Gibbs Sampling Approaches with Applications. Cambridge, MA: MIT Press.
Knetsch Thomas A. (2007) Forecasting the price of oil via convenience yield predictions. Journal of Forecasting 26, 527549.
Lanza Alessandro, Manera Matteo, and Giovannini Massimo (2005) Modeling and forecasting cointegrated relationships among heavy oil and product prices. Energy Economics 27, 831848.
Lowinger Thomas C. and Ram Rati (1984) Product value as a determinant of OPEC's official crude oil prices: Additional evidence. Review of Economics and Statistics 66, 691695.
Mark Nelson C. (1995) Exchange rates and fundamentals: Evidence on long-horizon predictability. American Economic Review 85, 201218.
Moors Kent (2011) Crack Spreads, Oil Futures and $5 Gasoline. Oil and Energy Investor. Available at:
Murat Atilim and Tokat Ekin (2009) Forecasting oil price moveaments with crack spread futures. Energy Economics 31, 8590.
Pesaran M. Hashem and Timmermann Allan (2009) Testing dependence among serially correlated multicategory variables. Journal of the American Statistical Association 104, 325337.
Reeve Trevor A. and Vigfusson Robert J. (2011) Evaluating the Forecasting Performance of Commodity Futures Prices. International finance discussion paper no. 1025, Board of Governors of the Federal Reserve System.
Sanders Dwight R., Manfredo Mark R., and Boris Keith (2008) Evaluating information in multiple horizon forecasts: The DOE's energy price forecasts. Energy Economics 31, 189196.
Stock James H. and Watson Mark W. (2004) Combination forecasts of output growth in a seven-country data set. Journal of Forecasting 23, 405430.
Strumpf Dan (2013) Goldman Cuts the Near-Term Brent Crude Forecast to $100 a Barrel. Wall Street Journal, April 23.
Verleger Philip K. (1982) The determinants of official OPEC crude oil prices. Review of Economics and Statistics 64, 177183.
Verleger Philip K. (2011) The margin, currency, and the price of oil. Business Economics 46, 7182.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *



Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 7 *
Loading metrics...

Abstract views

Total abstract views: 97 *
Loading metrics...

* Views captured on Cambridge Core between 10th August 2017 - 18th November 2017. This data will be updated every 24 hours.