How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock

Author/Editor:

Nese Erbil ; Shaun K. Roache

Publication Date:

September 1, 2010

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

How does a commodity market adjust to a temporary scarcity shock which causes a shift in the slope of the futures price curve? We find long-run relationships between spot and futures prices, inventories and interest rates, which means that such shocks lead to an adjustment back towards a stable equilibrium. We find evidence that the adjustment is somewhat consistent with well-known theoretical models, such as Pindyck (2001); in other words, spot prices rise and then fall, while inventories are used to absorb the shock. Importantly, the pace and nature of the adjustment depends upon whether inventories were initially high or low, which introduces significant nonlinearities into the adjustment process.

Series:

Working Paper No. 2010/222

Subject:

Commodity markets Futures Futures markets Metal prices Metals

English

Publication Date:

September 1, 2010

ISBN/ISSN:

9781455208876/1018-5941

Stock No:

WPIEA2010222

Pages:

35

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