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Speculation and Commodity Price
Dynamics
Stephan Schulmeister
Workshop „Financial Crash, Food Speculation and Development“
Berlin, 17th November, 2008
Overview

Theoretical basics

Price dynamics

Supply & demand conditions in the markets for
physical commodities

Technical trading and price dynamics

Dynamics of exchange rates and stock prices

Trading volume in overall financial markets

Concept of a general financial transaction tax
1
“Fundamentalist hypothesis”

Economic Mainstream

Supply and demand in spot markets

Rational actors in derivatives markets >

Price discovery process >

Destabilizing speculation only a
temporary phenomenon >

No persistent/systematic mispricing

Holds for asset prices in general
2
“Bull-bear hypothesis”

Fundamentals matter

Speculation as driving force

(Fundamental) News > overshooting

Trend-following trading systems

Feed-back upon price pattern >

(Commodity) Prices move in trends >

“Manic-depressive” fluctuations

Typical for asset prices in general
3
Crude oil futures price
150
2005 - 2008 (July)
7/11/08 (147.2)
140
130
Dollar per barrel
120
110
100
90
2/7/2008
80
70
60
50
1/17/07 (51.7)
40
1/2005 7/2005 1/2006 7/2006 1/2007 7/2007 1/2008 7/2008
4
Corn futures price
800
2005 - 2008 (July)
6/27/08 (795.0)
US cents per bushel
700
600
500
400
300
10/9/07 (340.0)
200
100
1/2005 7/2005 1/2006 7/2006 1/2007 7/2007 1/2008 7/2008
5
Wheat futures price
1400
2005 - 2008 (July)
3/13/08
(1265.0)
US cents per bushel
1200
1000
800
600
400
4/4/07 (425.0)
200
1/2005 7/2005 1/2006 7/2006 1/2007 7/2007 1/2008 7/2008
6
Rice futures price
4/24/08 (24.7)
2005 - 2008 (July)
25
US dollars per 100 pounds
23
21
19
17
15
13
11
9
7/19/07 (10.2)
7
5
1/2005
7/2005
1/2006 7/2006
7
1/2007
7/2007
1/2008
7/2008
Market for physical crude oil
Supply/production
Demand/consumption
Net imports of China
Commercial OECD inventories (end of period; right scale)
100
90
2700
2650
70
2600
60
2550
50
2500
40
2450
30
2400
20
10
2350
0
2300
1994
1996
1998
2000
2002
8
2004
2006
2008
Mill. barrels
Mill. barrel per day
80
2750
Crude oil prices
140
Crude oil futures price (WTI)
600
Crude oil spot price (Brent)
Trading volume of oil futures contracts (right scale)
500
Dollar per barrel
100
400
80
300
60
200
40
100
20
0
0
1Q1994 1Q1996 1Q1998 1Q2000 1Q2002 1Q2004 1Q2006 1Q2008
9
Mill. barrel per day
120
Market for physical corn
850
Supply/production
Demand/use
Inv entories/ending stocks (right scale)
800
200
750
180
650
160
600
140
550
500
120
450
400
1989/1990 1992/1993 1995/1996
100
1998/1999 2001/2002 2004/2005 2007/2008
10
1000 metric tons
1000 metric tons
700
Market for physical wheat
440
Supply/production
Demand/use
Inventories/ending stocks (right scale)
160
150
420
140
130
120
380
110
360
100
90
340
80
320
1989/1990
70
1992/1993
1995/1996
1998/1999
11
2001/2002
2004/2005
2007/2008
1000 metric tons
1000 metric tons
400
Market for physical rice
650
630
240
Supply/production
Demand/use
Inv entories/ending stocks (right scale)
220
610
1000 metric tons
570
180
550
160
530
510
140
490
120
470
450
1989/1990
100
1992/1993
1995/1996
1998/1999
12
2001/2002
2004/2005
2007/2008
1000 metric tons
200
590
Commodity futures prices
400
340
Crude oil
Wheat
Corn
Rough rice
02/01/2005 = 100
280
220
160
100
40
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
13
Commodity derivatives trading
50
45
500
All exchange-traded commodity derivatives
Open interest
440
Trading volume (right scale)
380
35
30
320
25
260
20
200
15
140
10
5
1Qu00
80
1Qu01
1Qu02
1Qu03
1Qu04
14
1Qu05
1Qu06
1Qu07
1Qu08
Traded contracts in Mill.
Outstanding contracts in Mill.
40
Trend-following trading system
150
140
Daily price
15-day mov ing av erage (MAS)
60-day mov ing av erage (MAL)
130
$ per barrel
120
110
S(1/25/2008)
100
L(2/21/2008)
90
2/11/2008
80
70
L(9/7/2007)
S(8/27/2007)
60
50
15
Trading signals and oil price dynamics
145
WTI crude oil futures contract
135
$ per barrel
125
115
105
2/21/2008
95
85
2/7/2008
75
100
Net position index of 1092 technical trading systems
Reihe2
Reihe3
0
-100
16
Dollar exchange rate and
oil price fluctuations
Effectiv e dollar exchange rate
Oil price (right scale)
130
70
60
120
50
40
100
30
90
20
80
10
70
0
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
17
In $
1986 = 100
110
Stock prices and
real accumulation
Germany
800
1200
1960 = 100
Stock prices
600
1982 = 100
1000
Market capitalisation
Real capital stock
800
Net w orth
600
400
400
200
200
0
0
1982 1985 1988 1991 1994 1997 2000 2003
1960 1963 1966 1969 1972 1975 1978 1981
Source: Wifo-databank.
18
Profitability and price effects of
technical commodity futures trading


1092 models tested over 1989/2008
(June)
Annual average return 12.7% (oil), 3.8%
(corn), 2.4% (wheat) and 12.6% (rice).

Much higher during 2007/2008

Leverage factor ~15

Profitability due to “trending”

Aggregate trading > strengthens
“trending”
19
Additional evidence on the role of
commodity futures speculation
•Commodity derivatives funds rose from
13 bill.$ (2003) to 260 bill. $.
•Main actors: Hedge funds, commodity
index funds, banks (Goldman, Morgan,
Deutsche).
•Also an increasing number of amateurs.
•Profits of Goldman and Morgan from
commodity trading 2007: 7,5 bill. $.
•Trading activities
20
Daily US dollar/euro
exchange rate 1999-2005
04/12/30
1.4
Daily price
35-day mov ing av erage (MAL)
1.3
1.2
1.1
1.0
0.9
00/10/26
02/01/31
0.8
21
Intraday US dollar/euro
exchange rates, June, 6-13, 2003
5-minute price
1.19
13/21:55
35-period mov ing av erage (MAL)
6/9:10
11/13:45
9/13:10
1.18
13/12:35
1.17
6/14:15
9/6:55
11/1:50
1.16
22
Technical trading signals for
S&P 500 futures contract
1540
30-minut es price
15-period moving average (MAL)
1520
L (7/10)
1500
S(7/5)
1480
1460
L(7/6)
1440
1420
3
O scillators
Momentum (time span = 12)
Moving average (MAS= 1/ MAL= 15)
2
1
0
-1
-2
-3
23
Overall financial transactions
in the world economy
80
Total
70
Spot markets
World-GDP = 1
60
Deriv ativ e markets
50
40
30
20
10
0
1990
1994
1998
24
2002
2006
Financial transactions in the world
economy by instruments
50
45
Stocks and bonds (spot)
40
Foreign exchange (spot)
Exchange-traded derivatives
World-GDP = 1
35
OTC derivatives
30
25
20
15
10
5
0
1990
1992
1994
1996
1998
25
2000
2002
2004
2006
Some conclusions
• Discrepancy real/financial transactions
• Speculation in derivatives grows fastest
• Hedging almost irrelevant
• Short-term price runs accumulate to
• „Manic-depressive“ fluctuations of the
•
•
•
most important prices >
Depresses real economy
A small FTT would affect only very shortterm transactions with high leverage >
A FTT would dampen asset price
fluctuations.
26
A general transaction tax
•
Tax base:
•
•
•
All transactions of „financial assets“
Spot und derivatives
On exchanges and „over-the-counter“
(OTC)
•
Three tax rates: 0,1%, 0,05%, 0,01% of asset
value
•
Three scenarios about the reduction of trading
due to the FTT (differentiated by types of
instruments)
27
FTT receipts at a rate of 0.01
World
Reduction in
transaction
volume
In % of GDP
Europe
In Bill. $
In % of GDP
In Bill. $
Exchange traded derivatives
Low
Medium
High
0.30
0.27
0.23
146.7
128.6
110.5
0.31
0.27
0.23
47.0
41.2
35.4
All transactions
Low
Medium
High
0.55
0.49
0.42
266.0
234.0
201.7
28
0.78
0.68
0.59
118.2
103.9
89.4
Steps towards the realization of a FTT
•
Step 1: Transactions on organized exchanges in
EU.
•
•
Step 2: OTC-transactions within Euro area.
•
Administrative costs extremely low due to
electronic settlement systems.
•
FTT would be highly concentrated on countries
with big financial centers.
•
Tax circumvention not (very) relevant due to low
tax rate and network externalities (> successful
stamp duty of even 0.5% in UK).
Step 3: Global OTC-transactions (including
foreign exchange).
29