Publications: Notes at the Margin

Excess Returns to Storage: The Information Content, Part I (November 16, 2020)


PKVerleger LLC conducted statistical tests to determine whether they contain useful information. Specifically, we asked, “Do excess returns contain information regarding the future movement of cash prices?” As it turns out, it does in some circumstances. In this and forthcoming reports, we will explain what we learned.


The analysis starts with excess returns to storage for Brent. Every week, we calculate these returns for twelve futures contracts. Currently, this would be for the January 2021 to December 2021 futures contracts. For this analysis, we examined the information content of excess returns computed for the third futures contract. We sought to determine the relationship between the price change from the date the excess return was measured and the excess return. Table 1 below offers the results of our first test.


As the table title indicates, we examined the percentage change in price in four weeks associated with various excess returns levels. The first column lists the nine levels of excess returns we analyzed. The period examined runs from January 1992 to December 2019. The table’s second column shows the mean percentage change in the observations. The third shows the standard deviation from the mean, and the fourth contains the observation count.


Note first that the results seemed initially counterintuitive. They show that prices increase when markets are in contango and decrease when markets are backwardated. On an a priori basis, we expected the opposite. However, the results speak for themselves and are compelling.


Consider first the finding that prices increased by 5.23 percent on average in a month following a date when the three-month-forward excess return equaled forty percent. Between 1992 and 2019, excess returns for Brent exceeded forty percent on forty-nine occasions. (Note that we excluded the 2020 data from this study.) The high excess returns indicate that cash prices were more than ten percent below the three-month-forward price. Such a situation occurs as inventories rise and pressure intensifies on producers. In these cases, one would expect oil-exporting nations to gather, have discussions, and possibly announce production cuts or other efforts to balance the market. Cash prices would respond. This probably explains why price increases follow large contangos (positive excess returns).


PKVerleger LLC conducted similar tests for Brent eight weeks after the computation date, for the third and sixth WTI excess return four weeks after the computation date, and for the October and November excess returns for NY Harbor distillate fuel oil four weeks after the computation date. The results for all tests were statistically significant and demonstrated a price predictive capacity for these excess returns to storage. These results are reported and discussed in this issue of Notes at the Margin.


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Table 1. Mean Average Change in Cash Price Four Weeks after Computation Date of Excess Return vs. Excess Return for Third Brent Future

Excess Return

at Annual Rate

Avg. % Change in Price in Four Weeks

Standard Deviation

# of Observations

> 40%

> 30%

> 20%

> 10%


< 10%

< 20%

< 30%

< 40%




























Source: PKVerleger LLC.