The authors propose a new benchmark to evaluate forecasts of averaged series, such as the monthly real price of oil. The new benchmark is based on the last high-frequency observation of the underlying series and allows forecasters to test for predictability. The authors also warn that forecast comparisons with the conventional benchmark can introduce spurious predictability. In an application to the real price of crude oil, the authors find that the new benchmark overturns the existing evidence for oil-price predictability: the real price of oil is more difficult to predict and behaves more similar to the prices of financial assets than implied by the academic literature. The authors’ results also highlight that incorporating information from high-frequency observations into forecasting models can yield large gains in forecast-accuracy. Such gains are likely to occur in any setting where forecasters work with averaged data and the underlying series are very persistent.
On the Negative Pricing of WTI Crude Oil Futures
Research by Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K. and Associate Editor of the GCARD; and Joëlle Miffre, Ph.D., Audencia Business School, France
WTI crude oil futures markets experienced the unprecedented phenomenon of negative prices on April 20, 2020. Several energy market pundits attributed the event to the large United States oil exchange-traded fund (“USO”) due to the rolling of positions out of the May 2020 contract (CLK20) before the contract’s maturity on April 21, 2020. The authors show empirically that USO flows have not influenced the flat price of WTI futures in general, nor of the CLK20 contract in particular.
A blend of macroeconomic/geopolitical conditions, including the sudden demand plunge associated with COVID-19 pandemic-control measures and various supply spikes due to Russia-Saudi Arabia tensions, contributed to a contangoed WTI futures curve that attracted cash-and-carry (C&C) arbitrage, sharply increasing the inventories at Cushing, and feeding into a super-contango, as concerns on storage capacity loomed. That said, a full understanding of the negative WTI price phenomenon of April 20, 2020 will require a formal examination of market microstructure issues on that day.
Persistence of Commodity Shocks
By John Baffes, Ph.D., Senior Agriculture Economist, Prospects Group, World Bank and Member of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board; and Alain Kabundi, Ph.D., Senior Economist, Prospects Group, World Bank
Based on an analysis of 27 commodities during 1970-2019, this article finds that transitory and permanent shocks contributed almost equally to commodity price variations, although with wide heterogeneity. Permanent shocks accounted for two-thirds of the variability in annual agricultural commodity prices but less than half of the variability in base metals prices. For energy prices, permanent shocks have trended upward, for agricultural prices, downwards, and for metals prices, flat. The volatility triggered in April-to-October 2020 by the COVID-19 pandemic appears to constitute a series of largely transitory shocks for commodity prices.
Update from the Research Director of the J.P. Morgan Center for Commodities
By Jian Yang, Ph.D., CFA, J.P. Morgan Endowed Research Chair, JPMCC Research Director, and Discipline Director and Professor of Finance and Risk Management, University of Colorado Denver Business School
In this brief report, Dr. Jian Yang provides updates on the JPMCC’s research activities through February 2021. In particular, Dr. Yang discusses (a) cover story articles in China Futures Magazine, which were written by professionals affiliated with the JPMCC; (b) the Center’s applied research insights, which were cited by the media; and (c) the JPMCC’s upcoming international commodities symposium and other research activities.
Updates from the J.P. Morgan Center for Commodities' Leadership Team
This article provides a brief update on the many events and initiatives that have taken place during the last six months, including (a) new sponsorship for the GCARD; (b) the addition of a new Industry Advisory Council member; (c) the appointment of two new GCARD Editorial Advisory Board members; (d) the latest JPMCC collegiate courses; (e) the upcoming Professional Education courses that are being offered jointly with the CU Denver Global Energy Management program; and (f) the scheduling of the August 2021 international commodities symposium. The JPMCC’s Executive Director is Dr. Thomas Brady, Ph.D.