Which Risk Factors Drive Oil Futures Price Curves? Speculation and Hedging in the Short and Long-Term

We develop a consistent estimation framework, which builds on the familiar two-factor model of Schwartz and Smith (2000), to allow for an investigation of the influence of observable covariates, such as inventories, production or hedging pressure, on the term structure of crude oil futures prices. Using this novel Hybrid Multi-Factor (HMF) model, we can obtain closed form futures prices under standard risk neutral pricing formulations, and we can incorporate state-space model estimation techniques to consistently estimate both the structural features related to the convenience yield and spot price dynamics (long and short term stochastic dynamics) and also the structural parameters that relate to the influence on the spot price of the observed exogenous covariates. We can utilise such models to gain significant insight into the futures and spot price dynamics in terms of interpretable observed factors that influence speculators and hedgers differently, which is not attainable with existing modelling approaches.