Managed Money and Oil Convenience Yield Dynamics

Financialization of commodity markets is the growing trend whereby participants treat commodities as financial assets. This paper examines whether managed money flows affect the convenience yield in crude oil markets. We employ a dataset that disaggregates the open interest between commercial participants and managed money. We find that changes in the net position of managed money have a significant negative effect on the net convenience yield, indicating that flows into long positions exert upward pressure on futures prices relative to spot prices. We show that this effect is significantly different from that of commercial participants, whose changes in positions do not seem to impact net convenience yields. We control for changes in inventories and volatility levels. Higher inventories, unsurprisingly, lead to a lower net convenience yield, consistent with the theory of storage. Volatility has heterogeneous effects: higher oil-specific volatility (OVIX) decreases net convenience yields, while higher financial volatility (MOVE) increases them. The latter effect, however, seems to be driven by a short but turbulent period with negative oil prices.