speculation and commodity price dynamics stephan schulmeister
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Speculation and Commodity Price Dynamics
Stephan Schulmeister
Workshop „Financial Crash, Food Speculation and Development“ Berlin, 17th November, 2008
2
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
3
“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
4
“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
5
Crude oil futures price
2005 - 2008 (J uly)
1/ 17/ 07 (51.7)
2/ 7/ 2008
7/ 11/ 08 (147.2)
40
50
60
70
80
90
100
110
120
130
140
150
1/ 2005 7/ 2005 1/ 2006 7/ 2006 1/ 2007 7/ 2007 1/ 2008 7/ 2008
Do
llar
pe
r b
arr
el
6
Corn futures price
2005 - 2008 (J uly) 6/ 27/ 08 (795.0)
10/ 9/ 07 (340.0)
100
200
300
400
500
600
700
800
1/ 2005 7/ 2005 1/ 2006 7/ 2006 1/ 2007 7/ 2007 1/ 2008 7/ 2008
US
ce
nts
pe
r b
ush
el
7
Wheat futures price
2005 - 2008 (J uly)
4/ 4/ 07 (425.0)
3/ 13/ 08
(1265.0)
200
400
600
800
1000
1200
1400
1/ 2005 7/ 2005 1/ 2006 7/ 2006 1/ 2007 7/ 2007 1/ 2008 7/ 2008
US
ce
nts
pe
r b
ush
el
8
Rice futures price
2005 - 2008 (J uly) 4/ 24/ 08 (24.7)
7/ 19/ 07 (10.2)
5
7
9
11
13
15
17
19
21
23
25
1/ 2005 7/ 2005 1/ 2006 7/ 2006 1/ 2007 7/ 2007 1/ 2008 7/ 2008
US
do
llars
pe
r 10
0 p
ou
nd
s
9
Market for physical crude oil
0
10
20
30
40
50
60
70
80
90
100
1994 1996 1998 2000 2002 2004 2006 2008
Mill
. ba
rre
l pe
r d
ay
2300
2350
2400
2450
2500
2550
2600
2650
2700
2750
Mill
. ba
rre
ls
Supply/productionDemand/consumptionNet imports of C hinaC ommercia l OEC D inventories (end of period; right scale)
10
Crude oil prices
0
20
40
60
80
100
120
140
1Q1994 1Q1996 1Q1998 1Q2000 1Q2002 1Q2004 1Q2006 1Q2008
Do
llar
pe
r b
arr
el
0
100
200
300
400
500
600
Mill
. ba
rre
l pe
r d
ay
C rude o il futures price (WTI)
C rude o il spot price (Brent)
Trading volume of o il futures contracts (right scale)
11
Market for physical corn
400
450
500
550
600
650
700
750
800
850
1989/1990 1992/1993 1995/1996 1998/1999 2001/2002 2004/2005 2007/2008
1000
me
tric
ton
s
100
120
140
160
180
200
1000
me
tric
ton
s
Supply/productionDemand/useInventories/ending stocks (right scale)
12
Market for physical wheat
320
340
360
380
400
420
440
1989/1990 1992/1993 1995/1996 1998/1999 2001/2002 2004/2005 2007/2008
1000
me
tric
ton
s
70
80
90
100
110
120
130
140
150
160
1000
me
tric
ton
s
Supply/produc tionDemand/useInventories/ending stoc ks (right sc ale)
13
Market for physical rice
450
470
490
510
530
550
570
590
610
630
650
1989/1990 1992/1993 1995/1996 1998/1999 2001/2002 2004/2005 2007/2008
1000
me
tric
ton
s
100
120
140
160
180
200
220
240
1000
me
tric
ton
s
Supply/production
Demand/use
Inventories/ending stocks (right scale)
14
Commodity futures prices
40
100
160
220
280
340
400
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
02/0
1/20
05 =
100
C rude oilWheatC ornRough rice
15
Commodity derivatives trading
All exchange-traded commodity derivatives
5
10
15
20
25
30
35
40
45
50
1Qu00 1Qu01 1Qu02 1Qu03 1Qu04 1Qu05 1Qu06 1Qu07 1Qu08
Ou
tsta
nd
ing
co
ntr
ac
ts in
Mill
.
80
140
200
260
320
380
440
500
Tra
de
d c
on
tra
cts
in M
ill.
Open interest
Trading volume (right scale)
16
Trend-following trading system
2/ 11/ 2008
L(2/ 21/ 2008)
S(1/ 25/ 2008)
L(9/ 7/ 2007)S(8/ 27/ 2007)
50
60
70
80
90
100
110
120
130
140
150
$ p
er
ba
rre
l
Daily price15-day moving average (M AS)60-day moving average (M AL)
17
Trading signals and oil price dynamics
WTI crude oil futures contract
2/21/2008
2/7/2008
75
85
95
105
115
125
135
145
$ p
er b
arr
el
-100
0
100
Net position index of 1092 technical trading systemsReihe2Reihe3
18
Dollar exchange rate and oil price fluctuations
70
80
90
100
110
120
130
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
1986
= 1
00
0
10
20
30
40
50
60
70
In $
Effectiv e dolla r excha nge ra teO il p rice (right sca le)
19
Stock prices and real accumulation
0
200
400
600
800
1960 1963 1966 1969 1972 1975 1978 1981
Stoc k pric es
M arket c apitalisation
Real c apital stoc k
Net w orth
1960 = 100
0
200
400
600
800
1000
1200
1982 1985 1988 1991 1994 1997 2000 2003
1982 = 100
Germany
Source: Wifo-databank.
20
Profitability and price effects of technical commodity futures
trading1092 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”
21
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
22
Daily US dollar/euro exchange rate 1999-2005
0.8
0.9
1.0
1.1
1.2
1.3
1.4
Daily pric e
35-day moving average (MAL)
04/12/30
00/10/26 02/01/31
23
Intraday US dollar/euro exchange rates, June, 6-13,
2003
1.16
1.17
1.18
1.19
5-minute pric e
35-period moving average (MAL)6/9:10
9/13:1011/13:45
13/21:55
13/12:35
9/6:55
6/14:15
11/1:50
24
Technical trading signals for S&P 500 futures contract
1420
1440
1460
1480
1500
1520
154030-minutes price
15-period moving average (MA L)
Oscillators
-3
-2
-1
0
1
2
3 Momentum (time span = 12)Moving average (MAS=1/MAL=15)
L(7/6)
S(7/5)
L (7/10)
25
Overall financial transactions in the world economy
0
10
20
30
40
50
60
70
80
1990 1994 1998 2002 2006
Wo
rld-G
DP =
1
Total
Spot markets
Derivative markets
26
Financial transactions in the world economy by instruments
0
5
10
15
20
25
30
35
40
45
50
1990 1992 1994 1996 1998 2000 2002 2004 2006
Wo
rld-G
DP
= 1
Stocks and bonds (spot)
Foreign exchange (spot)
Exchange-traded derivatives
OTC derivatives
27
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 short-term transactions with high leverage >
• A FTT would dampen asset price fluctuations.
28
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)
29
FTT receipts at a rate of 0.01
Reduction in transaction volume
In % of GDP In Bill. $ In % of GDP In Bill. $
Low 0.30 146.7 0.31 47.0
Medium 0.27 128.6 0.27 41.2
High 0.23 110.5 0.23 35.4
Low 0.55 266.0 0.78 118.2
Medium 0.49 234.0 0.68 103.9
High 0.42 201.7 0.59 89.4
World
Exchange traded derivatives
All transactions
Europe
30
Steps towards the realization of a FTT
• Step 1: Transactions on organized exchanges in EU.
• Step 2: OTC-transactions within Euro area.
• Step 3: Global OTC-transactions (including foreign exchange).
• 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).
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