WTI Futures Curve Analysis Using PCA (Part I)
WTI Futures Curve Analysis Using PCA (Part I)
Background
Thegeneraldemandforpetroleumproductsishighlyseasonalandisgreatestduringthewintermonths, whencountriesintheNorthernHemisphereincreasetheiruseofdistillatedheatingoilsandresidual fuels.Supplyofcrudeoil,includingbothproductionandnetimports,alsoshowsasimilarseasonal variationbutwithasmallermagnitude. Duringthesummermonths,supplyexceedsdemandandpetroleuminventoriesnormallybuild;whereas duringthewinter,demandexceedssupplyandinventoriesaredrawndown.Asaresult,inventoriesalso demonstrateseasonality. Intheory,futurespricesarecomputedasfollows: PCAforWTI/CLFutures
Ft ,T St e
( rt ,T xt ,T qt ,T )(T t )
SpiderFinancialCorp,2013
Where
Now,letstakethelogarithmofeachside:
t ,T rt ,T xt ,T qt ,T
ln( Ft ,T / St ) T t
Data Preparation
Inthispaper,wewillusetheclosingmarksoftheimmediatefour(4)tradedNYMEXCLfuturecontracts oftheEIAwebsite.Furthermore,wealsousethespotpricesforWTIcrudeoilatCushing,OK(delivery locationforNYMEXCLcontracts)oftheEIAwebsiteaswell. Tocompileourdataset,weusethenumberofdaystothe1stdayofthedeliverymonthasourhorizon (i.e.theindependentvariableofthefuturecurve).WerefertothisasdaystodeliveryorDTD. Next,accordingtoNYMEXproductspecification,thetradingofacrudeoilfuturecontractterminates baseonthefollowingrule(s):
PCAforWTI/CLFutures
SpiderFinancialCorp,2013
Tradinginthecurrentdeliverymonthshallceaseonthethirdbusinessdaypriortothetwenty fifthcalendardayofthemonthproceedingthedeliverymonth.Ifthetwentyfifthcalendarday ofthemonthisanonbusinessday,tradingshallceaseonthethirdbusinessdaypriortothelast businessdayproceedingthetwentyfifthcalendarday.IntheeventthattheofficialExchange holidayschedulechangessubsequenttothelistingofCrudeOilfutures,theoriginallylisted expirationdateshallremainineffect.Intheeventthattheoriginallylistedexpirationdayis declaredaholiday,expirationwillmovetothebusinessdayimmediatelyprior Usingthelasttradingdayrules,wedeterminewhenthefrontcontractswitchestothefollowingmonth contract,and,thus,computethepropertradingdaystothe1stdayofthedeliverymonth.For computingthetradingdays,adjustingforweekendsandholidays,weusedtheNumXLcalendar functionswiththeUSDcalendar. Asaresult,foreachtradingday,weusethefour(4)contractstoconstructafuturecurve(futureprices versusnumberofdaystodeliver(DTD)). Next,oneachday,usingthefuturecurveabove,weinterpolate/extrapolate(cubicspline)thefuture pricesfordeliverytermsrangingfrom10daysto120days(12terms). Next,usingtheformulabelow,wetransformthefuturepricesintothenetoftheinterestrate,storage costandconvenienceyield(i.e. t ,T )
t ,T rt ,T xt ,T qt ,T
ln( Ft ,T / St ) T t
Forexample,onApril29,2013,theWTIfuturecurveexhibitsahumpshapedcurve:
PCAforWTI/CLFutures 3 SpiderFinancialCorp,2013
Analysis
LetsfirstexaminethecorrelationbetweenthetwelveNISCinputtimeseries.
PCAforWTI/CLFutures 4 SpiderFinancialCorp,2013
Theshorttermdeliveries(<30days)oftheNISCcorrelateweaklywithlongertermsfutures.Notethat thisphenomenonisnotfoundintherawfutureprices.
LaunchthePCAWizard,specifyinputvariablesandcomputethePCAstatistics.
PCAforWTI/CLFutures 5 SpiderFinancialCorp,2013
PCAforWTI/CLFutures 6 SpiderFinancialCorp,2013
Canthisbethestoragecostperyear?Unlikely,astheloadinggoesnegativebetween20and70daysto delivery.Fortunately,itsvarianceandcontributiontotheoverallvariationarerelativelysmall.
Conclusion
Insum,wefoundthatthenetinterest,storageandconvenienceyield(NISC)ofWTIfuturesareprimarily drivenbytwouncorrelateddrivers.Thefirstdriverexhibitsatermstructuresimilartotheyieldcurve andtheseconddriverwashypothesizedasaproxytotheconvenienceyield. Wait a minute! Youmaywonder:canIleverageainterestrateinstrument(e.g.Eurodollar,swaps,etc.)tohedgethe interestrateexposureinmyWTIfuturesportfolio? Inafollowuppaper,wewillexaminetheLIBORyieldcurvedataintoouranalysisandfinetuneourrisk driversfurther,isolatingthestorageandconvenienceyieldfromtheinterestrate. Why do we care? AportfolioofWTIfuturecontractscanbehedged(97.8%effective)fornonspotpricechangesusing onlytwo(2)differentfuturecontracts. Whataboutspotchanges? Whatisthehedgingration? Howoftendowerebalancethehedge?
PCAforWTI/CLFutures
SpiderFinancialCorp,2013