Published online by Cambridge University Press: 17 August 2020
We study the dynamics of cash-and-carry arbitrage using the U.S. crude oil market. Sizable arbitrage-related inventory movements occur at the New York Mercantile Exchange (NYMEX) futures contract delivery point but not at other storage locations, where instead, operational factors explain most inventory changes. We add to the theory-of-storage literature by introducing two new features. First, due to arbitrageurs contracting ahead, inventories respond to not only contemporaneous but also lagged futures spreads. Second, storage-capacity limits can impede cash-and-carry arbitrage, leading to the persistence of unexploited arbitrage opportunities. Our findings suggest that arbitrage-induced inventory movements are, on average, price stabilizing.
We thank Hendrik Bessembinder (the editor) and Allen Carrion (the referee) for suggestions that have substantially improved this paper. We also thank Bruce Bawks, John Conti, Huseyin Gulen, Yeejin Jang, Lutz Kilian, Andrei Kirilenko, Yongjia Li, Anthony May, John McConnell, Stefano Rossi, Latha Shanker, Sophie Shive, Glen Sweetnam, Deniz Yavuz, Xiaoyan Zhang, and John Zyren and seminar participants at the 2017 Wabash Conference, the 2013 U.S. Energy Information Administration, the 2019 Financial Management Association annual meetings, Purdue University, the University of Calgary 2017 International Energy Agency (IEA)/International Energy Forum (IEF)/Organization of the Petroleum-Exporting Countries (OPEC) Workshop on the Interactions between Physical and Financial Energy Markets, the 2016 Energy and Commodity Finance Conference, and the 2016 Commodity Market Conference for valuable discussions and comments. We thank Harry Pefanis of Plains All American Pipeline for kindly providing us data on storage costs. We also thank Moody’s Analytics for providing us the historical expected default frequency data. We gratefully acknowledge financial support from the U.S. Department of Energy (EIA) and the University of Oklahoma Office of the Vice President for Research. The views expressed in this paper reflect the opinions of the authors only and do not necessarily reflect the views of the EIA or the U.S. Department of Energy. The authors are solely responsible for all errors and omissions.