Scarcity, risk premiums and the pricing of commodity futures : the case of crude oil contracts

In this paper, risk premiums of commodity futures are directly related to the physical scarcity of commodities; for this purpose, we propose a simple decomposition of spot prices into a pure asset price plus a scarcity related price component. This replaces the traditional convenience yield which results from an imperfect no-arbitrage relationship of the term structure of commodity futures prices. Our empirical tests confirm that two separate commodity-specific risk premiums affect the pricing of crude oil futures contracts: a net hedging pressure premium and a scarcity premium. The two premiums show different cyclical characteristics. We also find that asset market risk factors such as exchange rates or stock market shocks affect the term structure of oil futures prices in a much more homogeneous way than commodity-specific hedging pressure or scarcity shocks.