Speculative Floating Oil (2022) with Solène Collot and Andrei Kirilenko, Best Paper Award at CU Denver Business School's International Commodity Symposium at University of Colorado Denver
Abstract: We build a partial equilibrium asset pricing model in which we develop a limits to arbitrage extension by introducing cash-and-carry traders’ activities in a speculative storage framework. Our model overcomes important issues found in the literature. First, we propose a closed form pricing equation for the term structure of commodity futures prices with a critical nonlinearity parameter that captures the nonnegativity of speculative storage. Second, we recover a proxy for speculative seaborne inventory of crude oil using a new data set collecting granular information on every tanker that delivered seaborne crude oil into the United States during 2008-2012. As predicted by the model, we find that in equilibrium, cash-and-carry traders’ activities are non-linearly linked to the risk premium in commodity prices and the cost of floating storage. We show that, not only our model is capable to incorporate first-order features of the data but also that, arbitrageurs have the ability to send a powerful signal about the state of the market
and alert market participants as well as policy-makers to potential supply disruptions.