An Empirical Analysis of Commodity Convenience Yields

We study convenience yield dynamics using a dataset of inventories to proxy for relative scarcity. We confirm that convenience yields are negatively related to inventories although they plateau during periods of scarcity for crude oil. Inventory withdrawals are non-monotonically related to the convenience yield and they forecast significant futures returns. Testing for the effect of demand shocks, we document both temporary and permanent price components. Importantly, we show that mean reversion in expected equilibrium prices varies with relative scarcity. This result suggests an important bias in contingent claims models in extant practice.