Determinants of oil futures prices and convenience yields

Commodity futures prices are usually modelled using affine term structure spot price models with latent factors extracted from the data. However, very little research to date has considered the question -- What are the economic drivers behind the calibrated latent factors? This paper addresses this question in the context of a three-factor -- short-, medium- and long-term -- model for crude oil spot prices by studying the relations between these factors and appropriate economic variables. An affine combination of the short- and medium-term factors is identified as the (instantaneous) convenience yield. Estimating a structural vector auto-regression model we find that the short-term factor mainly relates to demand variables in the physical markets and to trading variables in the futures markets (such as the net short position of commercial hedgers), the medium-term factor relates to business cycles, demand and trading variables, and the long-term factor relates mainly to financial factors.