Why and when do spot prices of crude oil revert to futures price levels?

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Federal Reserve Board, Divisions of Research & Statistics and Monetary Affairs, 2005 - Technology & Engineering - 25 pages
The author specifies a structural oil-market model that links returns to convenience yield, inventory news, and revisions of expected production cost (growth of which is related to backwardation). Although its predictive power is only a marginal improvement, the model fits the data far better. In addition, the author finds reversion of spot to futures prices only when backwardation is severe. Convenience yield behaves nonlinearly, but price response to convenience yield is also nonolinear. Equivalently, futures are informative about future spot prices only when spot prices substantially exceed futures.

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