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Price spread and convenience yield behaviour in the international oil market

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  • Nikolaos Milonas
  • Thomas Henker

Abstract

This paper examines the price and volatility behaviour of two similar commodities (Brent Crude Oil and West Texas Intermediate) and attempts to identify the variables that affect their relative price differential. Price spreads and convenience yields are estimated in an effort to test a number of hypotheses relating to market segmentation, seasonality and maturity effect. Cash and futures price data covering the period 1991-1995 reveal that: convenience yields are significant and about 2.5% of cash prices on the average; convenience yields exhibit strong yearly and monthly seasonalities due to supply/demand imbalances; convenience yield is a negative function of the level of stocks and behaves like a call option; as maturity of futures contracts nears, their convenience yields get smaller, an indication that the maturity effect exists in futures prices, and crude oil price spreads are affected by convenience yields which act as surrogates for demand/supply conditions and market price behaviour.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 11 (2001)
Issue (Month): 1 ()
Pages: 23-36

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Handle: RePEc:taf:apfiec:v:11:y:2001:i:1:p:23-36

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Web page: http://www.tandfonline.com/RAFE20

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Cited by:
  1. C. L. Dunis & Jason Laws & Ben Evans, 2006. "Trading futures spreads: an application of correlation and threshold filters," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 903-914.
  2. Giulio Cifarelli & Paolo Paesani, 2012. "An Assessment of the Theory of Storage: Has the Relationship between Commodity Price Volatility and Market Fundamentals Changed Over Time?," Working Papers - Economics wp2012_12.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  3. Lautier, Delphine, 2003. "The informational value of crude oil futures prices," Economics Papers from University Paris Dauphine 123456789/1245, Paris Dauphine University.
  4. Diderik Lund, 2003. "How to analyze the investment–uncertainty relationship in real option models?," EPRU Working Paper Series 03-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  5. Murphy, Frederic & Oliveira, Fernando S., 2013. "Pricing option contracts on the strategic petroleum reserve," Energy Economics, Elsevier, vol. 40(C), pages 242-250.
  6. Lautier, Delphine, 2009. "Convenience Yield and Commodity Markets," Economics Papers from University Paris Dauphine 123456789/2274, Paris Dauphine University.
  7. Bertrand Candelon & Marc Joëts & Sessi Tokpavi, 2012. "Testing for crude oil markets globalization during extreme price movements," EconomiX Working Papers 2012-28, University of Paris West - Nanterre la Défense, EconomiX.
  8. Botterud, Audun & Kristiansen, Tarjei & Ilic, Marija D., 2010. "The relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 32(5), pages 967-978, September.
  9. Neil A. Wilmot, 2013. "Cointegration in the Oil Market among Regional Blends," International Journal of Energy Economics and Policy, Econjournals, vol. 3(4), pages 424 - 433.
  10. Reboredo, Juan C., 2011. "How do crude oil prices co-move?: A copula approach," Energy Economics, Elsevier, vol. 33(5), pages 948-955, September.
  11. Lautier, Delphine, 2005. "Segmentation in the Crude Oil Futures Term Structure," Economics Papers from University Paris Dauphine 123456789/95, Paris Dauphine University.
  12. Liu, Li & Chen, Ching-Cheng & Wan, Jieqiu, 2013. "Is world oil market “one great pool”?: An example from China's and international oil markets," Economic Modelling, Elsevier, vol. 35(C), pages 364-373.
  13. Szymon Borak & Wolfgang Härdle & Stefan Trück & Rafal Weron, 2006. "Convenience Yields for CO2 Emission Allowance Futures Contracts," SFB 649 Discussion Papers SFB649DP2006-076, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  14. Giulio Cifarelli & Giovanna Paladino, 2009. "Is Oil A Financial Asset? An Empirical Investigation Spanning the Last Fifteen Years," Working Papers - Economics wp2009_12.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  15. Candelon, Bertrand & Joëts, Marc & Tokpavi, Sessi, 2013. "Testing for Granger causality in distribution tails: An application to oil markets integration," Economic Modelling, Elsevier, vol. 31(C), pages 276-285.
  16. Fattouh, Bassam, 2010. "The dynamics of crude oil price differentials," Energy Economics, Elsevier, vol. 32(2), pages 334-342, March.
  17. Riva, Fabrice & Lautier, Delphine, 2004. "Liquidity and volatility in the American crude oil futures market," Economics Papers from University Paris Dauphine 123456789/1244, Paris Dauphine University.
  18. Chiou Wei, Song Zan & Zhu, Zhen, 2006. "Commodity convenience yield and risk premium determination: The case of the U.S. natural gas market," Energy Economics, Elsevier, vol. 28(4), pages 523-534, July.

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