The role of inventory in explaining the shape of the forward curve and spot price volatility in commodity markets is central in the theory of storage developed by Kaldor (1939) and Working (1949) and has since been documented in a vast body of financial literature, including the seminal paper by Fama and French (1987) on metals. The goal of this paper is twofold: i) validate in the case of oil and natural gas the use of the slope of the forward curve as a proxy for inventory; in contrast to Fama and French however, our slope is defined in order to filter out seasonality. ii) analyze directly for these two major commodities the relationship between inventory and price volatility. In agreement with the theory of storage, we find the negative correlation to be significant during those periods when the inventory is below the historical average (scarcity). Our results are illustrated by the analysis of a 20 year-database of US oil and natural gas prices and inventory.Forward Curves, Scarcity and Price Volatility in Oil and Natural Gas Markets 03/10/07
Through the analysis of the weekly Commodity Futures Trading Commission reports on 12 US traded agricultural commodities, we revisit the heated debate on the impact of index flows on commodities prices. After introducing a novel stock‐to‐use proxy that may be used to represent inventory variations at the intra‐month level, we show that speculators, contrary to index investors, are sensitive to commodity‐specific fundamental information. Their endogeneity to commodities markets hinders the estimation of their market impact. Regarding the market impact of index flows, the endogeneity problem is alleviated in two ways: first, we restrict the scope to agricultural commodities, for which index flows are more exogenous to market prices; second, we introduce two novel instrumental variables that are computed from index flows outside the market under analysis. We find that index investment flows are offset by commercial players, not speculators. The serial correlation of index flows may explain the tendency of speculators to synchronize with index investors. There is strong evidence of an index flows' impact in those commodities markets where speculative and index positions are the most correlated. The market impact of index flows is located in periods of liquidity stress, as is the correlation between speculative and index positions. Overall, our results demonstrate an impact of index investors on some agricultural prices and suggest that the synchronicity between speculative and index positions is an important determinant of this impact.
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