Energy Commodity Basis , Returns and the Business Cycle

This study examines the variation of spot and futures prices for energy commodities over the business cycle. The interest-adjusted basis and expected returns for crude oil, natural gas, heating oil, gasoline, and propane are estimated in relation to proxies for the state of the economy, inventory and other determinants predicted by the theory of storage over the period 1987-2011. We find that the energy bases and returns over three-month horizon have a business cycle pattern. Consistent with the theory of storage, demand shocks near business cycle peaks generate negative interest-adjusted bases and the positive returns. In recessions the bases become positive and the returns tend to be negative. The inventory is an important predictor for petroleum interest-adjusted bases when the physical stock is low, while its impact on the basis is small and insignificant when inventory is high. In turn, energy bases and economic conditions are informative about expected returns, and they can be used to predict energy future spot prices.