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Inventories and the term structure of oil prices: A complex relationship

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  • Considine, Jennifer
  • Galkin, Philipp
  • Aldayel, Abdullah

Abstract

According to conventional storage theory, the difference between spot and futures prices (known as the ‘basis’) can be explained by the total cost of storing a commodity for a specific period of time. The theory predicts a positive relationship between inventory levels and the basis, and a negative correlation between inventories and marginal convenience yield. We investigate whether there is a defined and quantifiable relationship between inventory levels and market structure – defined as the basis or the corresponding degree of contango/backwardation – and what the exact nature of that relationship might be. The major drivers of inventories – the cost of carry, convenience yield and spread options value – are estimated for eight major international storage hubs using daily data from December 21, 2015, to January 25, 2019.

Suggested Citation

  • Considine, Jennifer & Galkin, Philipp & Aldayel, Abdullah, 2022. "Inventories and the term structure of oil prices: A complex relationship," Resources Policy, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:jrpoli:v:77:y:2022:i:c:s0301420722001064
    DOI: 10.1016/j.resourpol.2022.102657
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