Redefining the convenience yield in the North Sea crude oil market

Working paper

The objective of this paper is to adapt the classical spot/futures relationship stemming from the theory of storage to the case of the North Sea crude oil market. Brent (and other North Sea crude oil grades) is waterborne and these logistical issues mean that a true spot market for Brent does not exist. As a result, the dated Brent (BFO) price, one of the most widely quoted ‘spot’ crude oil marker prices in the world, is in reality a short-term forward contract price. A new arbitrage relationship is constructed to take account of this and a new formulation for the convenience yield is calculated. Comparison is made with the classical convenience yield in the light of historic price behaviour in both Brent (BFO) and West Texas Intermediate (WTI) markets.

Authors: Caumon, F; Bower, J

• Publication status: Published
• Peer review status: Reviewed (other)
• Publisher: Oxford Institute for Energy Studies
• Series: OIES paper
• Publication date: 2004-01-01
• Edition: Publisher's version
• Paper number: M28
• ISBN: 1901795314
• Language: English
• Keywords: the North Sea; Brent; OIES; convenience yield; oil markets; WTI; futures contracts; option pricing theory; arbitrage; theory of storage