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

September 1, 2010

Preview Citation

Format: Chicago

Nese Erbil, and Shaun K. Roache How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock, (USA: International Monetary Fund, 2010) accessed September 18, 2024

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.

Subject: Commodity markets, Futures, Futures markets, Metal prices, Metals

Keywords: Interest rate, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/222
Stock No:

WPIEA2010222
ISBN:

9781455208876
ISSN:

1018-5941

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