Not All Oil Storage Shocks Are Alike: The Case of WTI during Times of COVID-19

Helyette Geman and Yuanye Ma

Chapter 11 in Peter Carr Gedenkschrift:Research Advances in Mathematical Finance, 2023, pp 379-392 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter, we revisit and adjust the famous theory of storage, introduced by Kaldor 1939, to the WTI crude oil during the COVID-19 time in 2020. The theory of storage describes features regularly observed in commodity markets, among which are the relationships between the size of inventory held by producers and consumers of a given commodity and the volatility of spot and future prices on one hand and the shape of the forward curve on the other hand (Working, 1949). We show that storage capacity in Cushing was a much more explanatory factor than production or imports during the period when the pandemic news broke out in the Western world. This property can be explained by the remarkable lack of storage that existed in Cushing, the delivery point of the NYMEX Futures contracts at that time, and brought, for the first time in the history of oil markets, WTI prices to the value of minus 37 dollars.

Keywords: Mathematical Finance; Quantitative Finance; Option Pricing; Derivatives; No Arbitrage; Asset Price Bubbles; Asset Pricing; Equilibrium; Volatility; Diffusion Processes; Jump Processes; Stochastic Integration; Trading Strategies; Portfolio Theory; Optimization; Securities; Bonds; Commodities; Futures (search for similar items in EconPapers)
JEL-codes: C02 C6 (search for similar items in EconPapers)
Date: 2023
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