Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil

Sung Je Byun

The Energy Journal, 2017, vol. 38, issue 5, 93-113

Abstract: This paper examines the role of inventories in refiners’ gasoline production and develops a structural model of the relationship between crude oil prices and inventories. Using data on inventories and prices of oil futures, I show that convenience yields decrease at a diminishing rate as inventories increase, consistent with the theory of storage. In addition to exhibiting seasonal and procyclical behaviors, I show that the historical convenience yield averages about 18 percent of the oil price from March 1989 to November 2014. Although some have argued that a breakdown of the relationship between crude oil inventories and prices following increased financial investors’ participation after 2004 was evidence of a speculative effect, I find that the proposed price-inventory relationship is stable over time. The empirical evidence indicates that crude oil prices remained tied to oil-market fundamentals such as inventories, suggesting that the contribution of financial investors’ activities was weak.

Keywords: Convenience yield; Forecasting oil prices; Speculation; Stable oil; price-inventory relationship; Theory of storage (search for similar items in EconPapers)
Date: 2017
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Journal Article: Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil (2017)
Working Paper: Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:38:y:2017:i:5:p:93-113

DOI: 10.5547/01956574.38.5.sbyu

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