Light crude oil is liquid petroleum that has a low density and flows freely at room temperature. It receives a higher price than heavy crude oil in commodity markets because it produces a higher percentage of gasoline and diesel fuel when converted into products by an oil refinery. It is light (API gravity) and sweet (low-sulfur) thus making it ideal for producing products like low-sulfur gasoline and low-sulfur diesel. West Texas Intermediate (WTI) is a crude oil benchmark used primarily in the U.S. Light sweet crude oil (WTI) futures contracts are traded in CME. The contract size is 1000 barrels. The oil-storage trade is a trading strategy where oil tank owners and companies that lease storage buy oil for immediate delivery and hold it in their storage tanks, then sell contracts for future delivery at a higher price. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. Storing oil became big business in 2008 and 2009 with many participants, including Wall Street giants, such as Morgan Stanley, Goldman Sachs, and Citicorp. This business generated sizable profits simply by sitting on tanks of oil.

(a) Suppose the forward curve is as shown in the table below and stays unchanged for four months. Is this market in a backwardation or a contango? In the oil-storage trade, if you enter a short position in a five-month futures contract and close it out four months later, what is your profit or loss from this futures contract?

Time to maturity	Spot	1/12	2/12	3/12	4/12	5/12	6/12
Futures price	90.00	90.30	90.60	90.90	91.21	91.51	91.82

(b) Suppose the interest rate is 2.50% and the storage cost is 3.50%. Assume that the convenience yield is constant. Based on the forward curve in (a) and the formula of forward prices, can you estimate the convenience yield?

(c) Suppose the forward curve is as shown in the table below and stays unchanged for three months. Is this market in a backwardation or a contango? If you enter a short position in a four-month futures contract and close it out three months later, what is your profit or loss from this futures contract?

Time to maturity	1/12	2/12	3/12	4/12	5/12	6/12
Futures price	79.73	79.47	79.20	78.94	78.68	78.42

(d) Again, suppose the interest rate is 2.50% and the storage cost is 3.50%. Also assume that the convenience yield is constant. Can you estimate the convenience yield based on the forward curve in (c)? Notice that you don’t observe the spot price in this case.