JP Morgan

Winter 2017

April 25, 2019 by

Winter 2017
Vol. 2, No. 2
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	Welcome Letter
	Rohan Christie-David, Ph.D., Dean and Professor of Finance, University of Colorado Denver Business School In this letter, Dr. Rohan Christie-David, Ph.D., the Dean of the University of Colorado Denver Business School, emphasizes the importance of the GCARD to the J.P. Morgan Center for Commodities’ overall strategy and to the extended global commodities community. The essence of the JPMCC mission is to foster the practical application of the latest innovations developed either in academia or in industry. This is of course the raison d’etre for the GCARD, and the JPMCC team will be working hard to continue its development and grow its audience as a primary resource to bring interest and participation to the Center. Read Letter
	Contributing Editor’s Letter
	Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School The GCARD team is happy to present the fourth issue of the Global Commodities Applied Research Digest. Members of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board have lent their expertise to the current issue. This issue features articles from across the commodity complex, including on the energy, metals, and agricultural sectors. This edition also includes articles relevant to commodity supply chains, commodity futures regulation, and to fiduciary due diligence. We welcome feedback from our readers on what topics would be of most value to commodity-market participants. Read Letter
	Research Council Corner
	ECONOMIST’S EDGE Oil Markets: The Analytical Challenges By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council Oil markets are especially hard to analyze. Since late 1973, when the Organization of the Petroleum Exporting Countries (OPEC) first flexed its muscles, the oil price has been on a roller coaster ride. Not only does one have to analyze the politics and economics of OPEC, but there have been major resource discoveries, such as the North Sea, as well as supply-side technological revolutions with hydraulic fracturing of shale oil. In addition, we are now looking forward to demand-side technological disruption from electric vehicles. The inability to assume a stable political or technological environment is a major challenge since the one thing that seems certain is that the supply and demand parameters are time-varying, and the parameter shifts seem to come in jumps and not in a steady pattern. Failure to use statistical techniques allowing for regime shifts can lead to estimates that unintentionally embed the view that the past is a useful predictor of oil market prices – which it is decidedly not. Our analysis here includes the major longer-term technological changes to consider on the supply and demand side, as well as examining short-term influences on oil prices in 2018. Read Article Global Gold Mine Supply By Thomas Brady, Ph.D., Chief Economist, Newmont Mining Corporation and Member of the JPMCC’s Research Council Since 1900, the global gold mine supply has been driven by periods of substantial exploration success, technological advances in both mining methods and processing and more recently by trends in gold prices themselves. This article provides a review of supply from Newmont’s Carlin operations in northern Nevada where the Company has been in operation since the mid-1960s and has benefited greatly from all of the aforementioned drivers. The lag between gold price trends and mine supply is also reviewed as well as expectations for global supply trends going forward. Read Article
	Research Council Report
	Rail Capacity Dynamics in North America Summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest At the JPMCC’s September 2016 Research Council meeting, Mr. John Schmitter, President, KEP LLC, discussed rail capacity challenges. This digest article summarizes Mr. Schmitter’s presentation, in which he explained 1) how railroads fit in the commodity supply chain, 2) North American railroad industry characteristics, 3) rail capital investment and capacity, and 4) rail availability risk. Read Article View Related Presentation
	Research Digest Articles
	The Effects of Margin Changes on Commodity Futures Markets By Charoula Daskalaki, Ph.D., Department of Economics, University of Crete, Greece; and George Skiadopoulos, Ph.D., Department of Banking and Financial Management, University of Piraeus, Greece As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board This digest article assesses the effect of margin changes on prices, the risk-sharing between speculators and hedgers, and the price stability of 20 commodity futures markets. The paper provides evidence that margin increases decrease the rate at which prices change, yet they impair the risk-sharing function and decrease market liquidity in certain markets. Read Article Stock Return Forecasting with Metals: Sentiment versus Fundamentals By Steven Jordan, Ph.D., Alfaisal University, Saudi Arabia; Andrew Vivian, Ph.D., Loughborough University, United Kingdom; and Mark Wohar, Ph.D., University of Nebraska-Omaha. As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board This article documents empirically that precious metals contain economically valuable predictive information content for stock returns. These gains remain after considering reasonable transaction costs, and are large enough to make active portfolio management potentially attractive, even for individual investors. Read Article The Skewness of Commodity Futures Markets By Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Bart Frijns, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K.; and Joëlle Miffre, Ph.D., Audencia Business School, Nantes, France As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board This article investigates the link between the skewness of the distribution of commodity futures returns and subsequent price changes. A trading strategy that goes long futures contracts with the most negative skew and shorts futures contracts with the most positive skew has historically generated significant alpha. Read Article
	Contributing Editor's Collection
	Common Miscalculations in Futures Trading By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School Gaining expertise in the commodity markets usually occurs through trial-and-error experiences, some of which can be quite painful. This article describes two frequent mistakes: (1) the use of inappropriate sizing and (2) a misunderstanding of the psychological discipline required for futures trading. Read Article Could Problems at MF Global Have Been Anticipated? By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School In the fall of 2011, futures market participants were caught off-guard when MF Global filed for bankruptcy. This article takes the position that a number of red flags existed as far back as 2007, regarding the firm’s financial weakness, which could have served as a warning to those investors relying on MF Global as a fiduciary. The article concludes that while MF Global’s business model appears not to have been viable after 2007, this observation does not excuse unlawful practices. In particular, the firm effectively (and arguably unlawfully) used customer funds in large-scale proprietary trades that the firm ultimately could not fund, leading to its chaotic bankruptcy. Read Article View Related Presentation Wheat Futures Contracts: Liquidity, Spreading Opportunities, and Fundamental Factors By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School This article discusses how fund managers can choose amongst wheat futures contracts at the CME Group if they are interested in expressing bullish economic and inflationary views through positions in the agricultural futures complex. Read Article
	Editorial Advisory Board Commentaries
	Chinese Economic Growth and Commodity Performance By Jodie Gunzberg, CFA, Managing Director, Head of U.S. Equities, S&P Dow Jones Indices and Member of the GCARD’s Editorial Advisory Board This article examines what the impact of the fluctuating fortunes of the Chinese economy appears to have been on the price performance of commodities overall, as well as on commodity sectors and individual commodities. The article is based on the author’s presentation at the JPMCC’s international commodities symposium in August 2017. Read Article View Related Presentation Futures Trading Opportunities: Fundamentally-Oriented and Convergence Trading By Isabel Figuerola-Ferretti, Ph.D., Professor of Finance, ICADE, Universidad Pontificia de Comillas (Madrid) and Member of the GCARD’s Editorial Advisory Board Gaining expertise in derivatives markets typically occurs by working in firms that have strict rules on keeping their trade secrets proprietary. This article helps fill the knowledge gap by covering both fundamentally-oriented trading and a type of convergence trading. Read Article View Related Presentation The History of a Supply-Driven Bear Market: Oil Price Surprises from 2014 through 2015 By Jan-Hein Jesse, Founder, JOSCO Energy Finance and Strategy Consultancy (Amsterdam) and Member of the GCARD’s Editorial Advisory Board This article is the first in a two-part series. The series will provide insights into the complex dynamics of oil price formation from 2014 onwards. Part 1 focuses on the events influencing the oil markets from 2014 through 2015 while Part 2, which will appear in the next issue of the GCARD, will cover the oil-market-moving events from 2016 through the present. The author previewed some of the work featured in this digest article during his Knowledge Exchange lecture at the JPMCC in April 2016. Read Article View Related Presentation Inferring Petroleum-Complex Fundamentals through Price-Relationship Data By Hilary Till, Contributing Editor, and Joseph Eagleeye, Editorial Advisory Board Member, GCARD This paper discusses inferring crude-oil-market fundamentals through price-relationship data, largely through the perspective of a commodity futures trader. In doing so, the paper briefly covers (1) the promise of big data; (2) the reality of data “black holes”; (3) the wealth of futures price data; (4) what futures prices potentially reveal about petroleum-complex fundamentals; and (5) caveats on the use of price data. Read Article View Related Presentation
	Industry Commentaries
	U.S. Haynesville Shale Gas Production By Faouzi Aloulou, Senior Economist, U.S. Energy Information Administration This article provides an update on the fortunes of the U.S. Haynesville shale region, which is amongst the top four natural gas production areas in the U.S. Technological improvements have led to a rebound in shale gas production to the highest levels for the region since the end of 2013. Read Article Approaching Tides: Convergence in World Natural Gas Prices By Colin Waugh, Partner, SCP Africa Investments Following a brief overview of the current global supply and demand situation for liquefied natural gas (LNG), this article examines to what degree non-market forces have contributed to a narrowing of inter-regional price differentials. Against an overlay of rapid technological change that has facilitated new sources of supply, the situation in North America is contrasted with the very different forces impacting LNG prices in Europe. Finally, the article surveys the largest and most rapidly changing global market, Asia, briefly evaluating each of the most important non-supply-demand factors to have reshaped LNG trade in recent years and their impact on price movement. Read Article
	Interview with a Thought Leader in Commodities
	Interview with Robert Greer, Scholar-in-Residence and Member of the Research Council at the J.P. Morgan Center for Commodities Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest In the Winter 2017 issue of the GCARD, we are honored to interview Mr. Robert Greer, Scholar-in-Residence at the JPMCC. Mr. Greer explains how he became involved in the commodity markets and what led him to writing the first published article on an investable commodity index. He also touches on some of the major changes in the commodity industry, concluding with a description of the value that the JPMCC can potentially bring to the commodity industry. Read Interview