Question

Why is convenience yield high when there is excess near term demand for crude oil. Also, why is convenience yeild HIGH when due to oversupply?

Answer 1

Convenience yield is the benefit associated with holding an underlying product or physical good. This yield resembles an inverse correlation to levels of storage and supply of Oil. Therefore when there is excess demand of oil or levels of storage starts to drop quick then "due to the expectations of increase in oil price in near future convenience yield increases ".

On the other hand when there is over supply of Oil like in the recent times of COVID-19 convenience yields tends to drop significantly as there is a built in expectations of drop in prices of oil in near term which is why no one wants to hold oil. Therfore convenience yield drops in the time of oversupply.

Although question is stating convenience yield High in time of over supply, is fundamentally incorrect. Logic is explained above.

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