Which Risk Factors Drive Oil Futures Price Curves?

Abstract

Supplementary material available at: https://ssrn.com/abstract=3312707

We develop a consistent estimation framework that builds on the familiar two-factor model of Schwartz and Smith (2000), to allow for an investigation of the influence of observable factors, such as inventories, production or hedging pressure, on the term structure of crude oil futures prices. We develop a novel Hybrid Multi-Factor (HMF) state-space regression model, in such a way that we can obtain closed form futures prices under standard risk neutral pricing formulations, and importantly we can incorporate state-space model estimation techniques to consistently and efficiently estimate the models developed. In particular, under the developed class of HMF models we can estimate both the structural features related to the convenience yield and spot price dynamics (or equivalently the long and short term stochastic dynamics) and also the structural parameters that relate to the influence on the spot price of the observed exogenous factors. We can utilise such models to gain significant insight into the futures and spot price dynamics in terms of interpretable observable factors that influence speculators and hedgers heterogeneously, which is not attainable with existing modelling approaches.

Keywords: Crude oil, Short-term factor, Long-term factor, Hybrid Multi-Factor model, Macroeconomical factors, Term structure

JEL Classification: C01, C1, C5, G13, Q02