Commodity Prices — Who’s Holding the Cards?

エコノミストは、あまりにも多くの手を持っている. 一方では, 彼らは、何か良いことを宣言することができる. 一方, 彼らは言うかもしれない, “よく, そんなにありません。” それらのいくつかはさらに第三又は第四の手を有していてもよい. 私の元ボス, 経済学者自身, かつて彼はこの手の一部を切り落とすことを希望すると述べて.

In the last couple of months, I plunged right into an ocean of economist hands as I sat down to do a minor research into this troubling phenomenon of skyrocketing food and commodity prices.

最初 “手” 指摘食料需要 (and energy and commodities in general) アジアの新興巨人に人口と変化する消費パターンの増加による急増しています. よく知られ需要と供給パラダイムは、価格サージを説明, それが思わ. それはそれと同じくらい簡単です?

一方, より多くの食用作物は、バイオ燃料の生産に転用されている. バイオ燃料需要が根本的な原因である? バイオ燃料が原因天文原油価格の魅力的, すべての価格を押し上げるもの. Is the recent OPEC windfall driving the price increases? どのような彼らの好意で市場を歪曲裕福な国の食料補助について?

Supply Side Difficulties

When explaining the food prices, one economic opinion puts the blame squarely on the supply side. これは、食料生産国で悪天候で揺るぎない指を指して, サプライチェーンに課さパニック対策, そのような輸出禁止と小規模な買いだめなど, それが価格を押し上げる.

Looking at the bigger picture, let’s study oil as a proxy commodity and study its dynamics. Because of its effect on the rest of the economy, oil is indeed a good proxy.

In the case of oil, the dearth on the supply side is more structural, it is argued. The production capacity has stagnated over the last thirty years or so [1]. No infrastructural improvements have been made after the seventies. 確かに, new methodological improvements are expensive for all the easy methods have been fully exploited; all the low-hanging fruits have been picked, 言ってみれば.

The harder-to-reach “fruits” include deep sea explorations, crude oil from sand and, somewhat more tenuously, bio-fuels. The economic viability of these sources of oil depends on the oil price. Oil from sand, 例えば, has an operating cost in the range of $20 へ $25, as Shell’s CFO, Peter Voser is quoted as stating [2]. アット $100 a barrel, oil from sand clearly becomes an economically viable source. Bio-fuels also are viable at high oil prices.

The huge investments involved in exploiting these new sources and their unpredictable economic viability exert strong upward pressure on oil prices, purely from the supply side, regardless of the demand situation. Once you invest a huge amount banking on a sustained high oil price, and then find that the oil market has softened below your viability level, you have to write off the investment, forcing losses and consequent price hikes.

With the high level of oil prices, investments are moving into infrastructure enhancements that will eventually ease the supply side crunch. But these fixes are slow in coming and are not going to ease the current dearth for about a decade. 言い換えると, the high prices are here to stay. 少なくとも, so say the economists subscribing this supply side explanation of things.

Demand Spike

Although I personally find it hard to believe, people assure me that the exponential demand explosion in the emerging economies was completely unforeseen. My friend from a leading investment bank (who used to head their hybrids desk) told me that there was no way they could have anticipated this level of demand. I should probably shelve my scepticism and believe those in the know.

One thing I do know from personal experience is that the dynamics of a demand crash is different in emerging economies for a variety of reasons. まず第一に, identical movements in fuel prices have different impact in the overall spending pattern depending on the proportion they represent in the purchasing power of an average consumer. A 30% increase in the pump price, 例えば, might mean a 5% reduction in the purchasing power to a US consumer, while it might mean 20% reduction for an Indian customer.

ほかに, retail fuel prices in India are regulated and supported by government subsidies. Subsidies act as levies delaying the impact crude oil price movements. But when the crude oil prices rise beyond a certain point, the subsidies become untenable and the retail fuel prices surge upward, ushering in instant demand crash.

I came across another view of the skyrocketing oil prices in terms of the Middle-Eastern and American politics. The view was that the Saudi oil capacity is going to increase by about 10% soon and the prices will drop dramatically in the first quarter of 2009. It was argued that the drop will come as boost to the new American president, and the whole show is timed and stage-managed with a clear political motivation.

Speculation

All these different opinions make my head spin. 私の訓練を受けていないビューで, I always suspected that the speculation in commodities market might be the primary factor driving the prices up. 私はよく知られているヘッジファンドマネージャーの最近の米上院の証言を読んだとき、私は私の疑念に正しさを立証感じた, マイケル·マスターズ [3], shed light on the financial labyrinth of futures transactions and regulatory loopholes through which enormous profits were generated in commodity speculation.

Since speculation is my preferred explanation for the energy and indeed other commodity price movements, I will go over some of the arguments in some detail. I hasten to state that the ideas express in this article are my own personal views (and perhaps those of Michael Masters [3] も). They do not represent the market views of my employer, their affiliates, the Wilmott Magazine, or anybody else. ほかに, some of these views are fairly half-baked and quite likely to be wrong, in which case I reserve the right to disown them and bequeath them to a friend of a friend. (また, see the box on Biased Opinions).

Masters points out that there is no real supply crunch. Unlike the Arab Oil Embargo time in 1973, there are no long lines at the gas pump. Food supplies are also healthy. So some new mechanism must be at work that drives up the commodity demand despite the price level.

Masters blames the institutional investors (pension funds, sovereign wealth funds, university endowments etc.) for the unreasonable demand on commodity futures. Since futures prices are the benchmark for actual physical commodities, this hoarding of the futures contracts immediately reflects in the physical spot prices and in the real economy. And as the prices climb, the investors smell blood and invest more heavily, stoking a deadly vicious cycle. Masters points out that the speculative position in petroleum is roughly the same as the increase in demand from China, debunking the popular notion that it is the demand spike from the emerging giants of Asia that is driving the oil price. 同様に, bio-fuel is not the driver in food prices — the speculators have stockpiled enough corn futures to power the entire US ethanol industry for a year.

Although quants are not terribly interested in the transient economic drivers of market dynamics or trading psychology, here is an interesting thought from Mike Master’s testimony. A typical commodity trader initiating a new trade is pretty much insensitive to the price of the underlying. He has, 言う, a billion dollars to “put to work,” and doesn’t care if the position he ends up holding has five million or ten million barrels of oil. He never intends to take delivery. This price-insensitivity amplifies his impact on the market, and the investor appetite for commodities increases as the prices go up.

Most trading positions are directional views, not merely on the spot price, but on volatility. In a world of long and short Vega positions, we cannot expect to get a full picture of trading pressures exerted on oil prices by studying the single dimension of spot. Is there a correlation between the oil prices and its price volatility?

Figure 1
フィギュア 1. Scatter-plot of WTI Spot prices in Dollar and its volatility. Although the plot shows random clusters at low spot levels, at price > $75 (highlighted in the purple box), there appears to be a structure with significant correlation.

フィギュア 1 shows a scatter plot of the WTI spot price vs. the annualized volatility from publicly available WTI spot prices data [4]. Note than my definition of volatility may be different from yours [5]. 一見したところで, there appears to be little correlation between the spot price and volatility. Indeed the computed correlation over all the data is about -0.3.

しかしながら, the highlighted part of the figure tells a different story. As the spot price climbed over $75 per barrel, the volatility started showing a remarkable correlation (の 0.7) with it. Was the trading activity responsible for the concerted move on both prices and volatility? That is my theory, and Michael Masters may agree.

Hidden Currency Theory

Here is a dangerous thought — could it be that traders are pricing oil in a currency other than the once mighty dollar? This thought is dangerous because international armed conflicts may have arisen out of precisely such ideas. But an intrepid columnist is expected to have a high level of controversy affinity, so here goes…

We keep hearing that the oil price is down on the back of a strong dollar. There is little doubt that the oil prices are highly correlated to the strength of the dollar in 2007 そして 2008, as shown in Table 1. Let’s look at the oil prices in Euro, the challenging heavy-weight currency.

Figure 1
フィギュア 2. Time evolution of the WTI spot price in Dollar and Euro. The Euro price looks more stable.

At first sight, フィギュア 2 does appear to show that the price is more stable when viewed in Euro, 予想通り. But does it mean that the traders are secretly pricing their positions in Euro, while quoting in Dollar? Or is it just the natural tandem movement of the Euro and WTI spots?

If the hidden currency theory is to hold water, I would expect stability in the price levels when priced in that currency. しかし, more directly, I would naively expect less volatility when the price is expressed in the hidden currency.

Figure 1
フィギュア 3. WTI Volatilities measured in Dollar and Euro. They are nearly identical.
Figure 1
フィギュア 4. Scatter-plot of WTI volatilities in Dollar and Euro. The excess population above the dividing line of equal volatilities implies that the WTI spot is more volatile when measured in Euro.

フィギュア 3 shows the WTI volatilities in Dollar and Euro. They look pretty much identical, which is why I replotted them as a scatter-plot of one against the other in Figure 4. If the Dollar volatility is higher, we will find more points below the red line, which we don’t. So it should mean that the hidden currency theory is probably wrong [6].

A good thing too, for nobody would be tempted to bomb me back to the stone ages now.

Human Costs

The real reasons behind the food and commodity price crisis are likely to be a combination of all these economic factors. しかし、危機自体が世界を席巻サイレント津波で, 国連世界食糧計画はそれを置くように.

食料価格の上昇, 不快でも, is not such a big deal for a large number of us. 私たちの最初の世界所得, 私たちのほとんどは、約過ごす 20% 食品上の私たちの給料の. それはなくなった場合 30% 結果として 50% 価格の上昇, 我々は確かにそれを好きではないん, しかし、我々はそれほど苦しむことはありません. 私たちは、タクシーの乗車を削減する必要があります, または高級ダイニング, それが私たちの世界の終わりではありません.

我々はトップにある場合 10% income bracket (as the readers of this magazine tend to be), 私たちも、増加に気付かないことがあります. 私たちのライフスタイルに高い食料価格への影響は最小限になります — 言う, a business-class holiday instead of a first-class one.

それは、下の方に別の話である. 我々はより少ないを稼ぐ場合 $1000 月, 私たちは過ごすことを余儀なくされている $750 代わりに $500 食品に, it may mean a choice between a bus ride and legging it. そのレベルで, the increase in food prices does hurt us, and our choices become grim.

しかし、価格は終わりの見えないと撃つとほとんど厳しい現実に直面この世界の人々がいる. Their choices are often as terrible as Sophie’s Choice. 空腹今夜スリープ状態になり、どの子? 残りの病気の1または食品のための医学?

我々は、すべての食糧危機を作成する市場の力の絶対的な力に対して無力である. 我々は現実的にこのサイレント津波のコースを変更することはできませんが, のは、少なくとも廃棄物を通じて状況を悪化させるしないようにしてみましょう. あなたが使用するものだけを購入する, そしてあなたがするために必要なもののみを使用. 私たちは常に空腹行く人たちを助けることができない場合でも、, 彼らが憧れを死ぬ何離れて投げることによって、それらを侮辱しないのを聞かせて. 空腹はひどいものです. あなたは私を信じていない場合, 日のために断食しようと. よく, あなたが行う場合でも、それを試してみてください — それはどこかで誰かを助けるかもしれないために.

結論

Commodity speculation by institutional investors is one of the driving factors of this silent tsunami of rising food prices. Their trading strategies have been compared to virtual hoarding in the futures market, driving up real prices of physical commodities and profiting from it.

I don’t mean to portray institutional investors and commodity traders as criminal masterminds hiding behind their multiple monitors and hatching plots to swindle the world. The ones I have discussed with do agree on the need to curtail the potential abuse of the system by closing the regulatory loopholes and setting new accountability frameworks. しかしながら, we are still on the rising edge of this influx of institutional funds into this lucrative asset class. Perhaps the time is not ripe enough for robust regulations yet. Let us make a bit more money first!

Reference and Endnotes

[1] Jeffrey Currie et al. “The Revenge of the Old ‘Political’ Economy” Commodities (Goldman Sachs Commodities Research), 3月 14, 2008.
[2] Business Times, “Shell counts rising cost of squeezing oil from sand in Canada,” 3月 18, 2008. HTTP://business.timesonline.co.uk/tol/business/article3572646.ece
[3] Testimony of Michael W. Masters (Managing Member / Portfolio Manager, Masters Capital Management, LLC) before the Committee on Homeland Security and Governmental Affairs. 5月 20, 2008. http://hsgac.senate.gov/public/_files/052008Masters.pdf
[4] Cushing, OK WTI Spot Price FOB (Dollars per Barrel) Data source: Energy Information Administration. HTTP://tonto.eia.doe.gov/dnav/pet/hist/rwtcd.htm
[5] I define the WTI volatility on a particular day as the standard deviation of the spot price returns over 31 days around that day, annualized by the appropriate factor. Using standard notations, the volatility on a day t is defined as:
sigma (t) = sqrt {frac{1}{{31}}sumlimits_{t - 15}^{t + 15} {left( {ln left[ {frac{{S(t)}}{{S(t - 1)}}} right] - mu } right)^2 frac{{252}}{{31}}} }
[6] Given that the correlation between EUR/USD and WTI Spot is positive (で 2007 そして 2008), the volatility, when measured in Euro, is expected to be smaller than the volatility in Dollar. The expected difference is tiny (約 0.3% 絶対的な) because the EUR/USD volatility (defined as in [5]) についてです 2%. The reason for the counter-intuitive finding in Figure 4 is probably in my definition of the volatility as in [5].
[7] Monwhea Jeng, “A selected history of expectation bias in physics,” American Journal of Physics, 7月 2006, Volume 74, Issue 7, 巻. 578-583. HTTP://arxiv.org/pdf/physics/0508199

ボックス: Biased Opinions

As an ex-experimental physicist, I am well aware of the effect of bias. Once you have a favoured view, you can never be free of bias. It is not that you actively misrepresent the data to push your view. But you tend to critically analyze the data points that do not match your view, and tend to be lenient on the ones that do.

例えば, suppose I do an experiment to measure a quantity that Richard Feynman predicted to be, 言う, 1.37. I repeat the experiment three times and get values 1.34, 1.30 そして 1.21. The right thing to do is to report a measurement of 1.29 with an error of 0.06. しかし, knowing the Feynman prediction (そして, さらに重要なことには, knowing who Feynman is), I would take a hard look at the 1.21 trial. If I find anything wrong with it (which I will, because no experiment is perfect), I might repeat it and possibly get a number closer to 1.37. It is biases of this kind that physicists try very hard to avoid. See [7] for an interesting study on biases in physics.

In this column, I do have a favoured view — that the main driver of the commodity price inflation is speculation. In order to avoid pushing my view and shaping my readers’ opinion, I state clearly that there is a potential of bias in this column. The view that I have chosen to favour has no special reason for being right. It is just one of the many “hands” popular among economists.

執筆者について
The author is a scientist from the European Organization for Nuclear Research (CERN), who currently works as a senior quantitative developer at Standard Chartered in Singapore. The views expressed in this column are only his personal views, which have not been influenced by considerations of the firm’s business or client relationships. More information about the author can be found at his web site: http://www.Thulasidas.com.

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