Determinants of the Crude Oil Futures Curve: Inventory, Consumption and Volatility
32 Pages Posted: 14 Sep 2016 Last revised: 9 Nov 2020
Date Written: September 14, 2016
Since 2008, the usually negative crude oil futures spread has been positive for extended periods, raising doubts about conventional explanations. We re-examine the dynamics of the futures spread using monthly VARs on the CME WTI oil futures spread, OECD and U.S. oil and petroleum inventories and consumption, and historical and implied volatility. When we model the spread as one continuous series, results confirm bi-directional causation between inventory and the futures spread, as predicted by the theory of storage. However results show that excess inventory is not adequately modelled as deviations from a secular trend: consumption has a separate causal relation with de-trended inventory. When negative and positive spread regimes are modelled separately, we find that shocks to OECD petroleum consumption directly widen negative spreads. Further, increases in volatility make positive spreads more steeply positive but are not related to negative spreads, consistent with inelastic supply of crude oil.
Keywords: Oil futures curve, Inventory, Consumption, Implied volatility, VAR
JEL Classification: Q40, C58
Suggested Citation: Suggested Citation