Principal Components Analysis for Correlated Curves and Seasonal Commodities: The Case of the Petroleum Market

This article presents a family of term structure models that can be applied to value contingent claims in multicommodity and seasonal markets. We apply the framework to the futures contracts on crude and heating oils trading on NYMEX. We show how to deal with the problem of having to value products depending on the "whole" market, such as spread options on contracts on a single commodity maturing at different times (time-spreads) or spread options on the added value of the products derived from the raw commodity (crack spreads). Also, we show how to build term structure models for a commodity that experiences seasonality, such as heating oil.