Volume 15 | Issue 2 | Article 3
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What Puts the Convenience in Convenience Yields?
We examine heating oil and gasoline futures prices to determine the factors that drive deviations from the cost-of-carry model - what puts the convenience in convenience yields? We estimate a model that includes commodity supplies, macroeconomic variables, OPEC decisions, political unrest, and seasonal controls. Our model explains up to 87% of variation in monthly forward yields for heating oil, and 68% for gasoline. Moreover, we investigate the degree to which the term structure of futures prices is informative. Our findings show that a decomposed term structure of forward yields explains variations in refining capacity and inventories far better than near-horizon convenience yields alone.
