Vol. 7, No. 2
|Update from the Executive Director|
Update from the CoBank Executive Director of the J.P. Morgan Center for Commodities
This article provides a brief update from Dr. Thomas Brady, including the recent news that CU Denver’s J.P. Morgan Center for Commodities is merging with CU Denver’s Global Energy Management (GEM) Program. In addition, he discusses the academic initiatives of the combined entity. On the applied research front, the merger will allow GEM industry partners and stakeholders to participate in the Center’s annual applied commodity research symposium as well as contribute articles to the new version of the GCARD.Read Update
|Research Director Report|
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
Dr. Yang discusses (a) his co-authored paper on “Price Discovery in China’s Crude Oil Futures Markets: An Emerging Asian Benchmark?”, which is forthcoming in the Journal of Futures Markets; (b) the JPMCC’s 5th International Commodities Symposium in August 2022; and (c) the media coverage of the JPMCC’s symposium.Read Report Read Related News Article
|Research Council Corner|
Commodities in 2022: Risk Management Lessons from Russia-Ukraine, China, and the Dollar
By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council; and Arthur Yu, Manager, Data Science, CME Group
The authors’ analysis of commodities sets the stage by first concisely identifying the three most significant macro-factors for the year. With the foundation set, we examine a selection of energy, metals, and agricultural products where we highlight both the similarities and key differences in terms of how each commodity responded to our three major macro-factors. The article closes with some observations concerning the drivers of commodity super-cycles and the difficulties of risk management when uncertainty is elevated and risk is hard to quantify.Read Article
|JPMCC Symposium Presentations|
Are Rising Gasoline Prices the Main Determinant of the Surge in U.S. Consumer Price Inflation?
By Lutz Kilian, Ph.D., Senior Economic Policy Adviser, Federal Reserve Bank of Dallas, and Co-Chair of the Research Council of the J.P. Morgan Center for Commodities; and Xiaoqing Zhou, Ph.D., Senior Research Economist and Advisor, Federal Reserve Bank of Dallas
The article discusses recent evidence that gasoline price shocks have not been the main determinant of U.S. inflation. This evidence runs counter to the narrative that inflation would subside if only gasoline prices could be lowered. The article’s analysis suggests that gasoline price shocks do not have large persistent effects on inflation or long-run inflation expectations, which argues against traditional models of wage-price spirals.Read Article View Related Presentation
Are Temporary Oil Supply Shocks Real?
By Johan Brannlund, Ph.D., Assistant Director of Scientific Computing, Bank of Canada; Geoffrey Dunbar, Ph.D., Senior Research Advisor, Bank of Canada; and Reinhard Ellwanger, Ph.D., Senior Economist, Bank of Canada
Hurricanes disrupt oil production in the Gulf of Mexico because producers shut in oil platforms to safeguard lives and to prevent damage. We examine the effects of these temporary oil supply shocks for real economic activity in the U.S. We find no evidence that temporary oil supply shocks affect state-level employment or indirectly affect industrial production in sectors not immediately related to oil production. Temporary oil supply shocks appear to have minor price effects, mainly for gasoline prices and CPI inflation. We also find no effect on imports, exchange rates or the import price of oil. Our results suggest that oil reserves held by U.S. refiners are largely sufficient to absorb any temporary production disruptions.Read Article View Related Presentation
|Research Digest Articles|
The following research digest articles were contributed by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Bayes Business School, City, University of London, U.K. and Associate Editor of the GCARD
The Illusion of Oil Return Predictability: The Choice of Data Matters!
Research by Thomas Conlon, Ph.D., Michael Smurfit Graduate Business School, University College Dublin, Ireland; John Cotter, Ph.D., Michael Smurfit Graduate School of Business, University College Dublin, Ireland; and Emmanuel Eyiah-Donkor, Ph.D., Rennes School of Business, France.
This article re-examines the previously documented evidence of crude oil return predictability from several popular economic predictors and technical indicators and their combinations. It shows that monthly average oil returns are forecastable, in line with evidence documented in previous studies. On the contrary, no evidence of predictability is found for end-of-month oil returns. The authors conclude that the evidence of oil return predictability documented in previous studies may be misleading, as it stems from the use of within-month averages of daily oil prices in calculating monthly returns whereas end-of-month returns are more relevant for risk management and investment decision making as reflecting actual change in asset value.Read Article
A Bayesian Perspective on Commodity Style-Integration
Research by Ana-Maria Fuertes, Ph.D., Bayes Business School, City, University of London, U.K.; and Nan Zhao, Bayes Business School, City, University of London, U.K.
Commodity style-integration is appealing because by forming a unique long-short portfolio with simultaneous exposure to mildly correlated factors, a larger risk premium can be captured over time than with any of the underlying standalone styles. A practical decision that a commodity style-integration investor faces at each rebalancing time is the relative weight of the predictive- or sorting-signal that underlies each standalone style. The authors of this paper develop a new Bayesian optimized integration (BOI) method that accounts for estimation risk in the style-weighting decision. Focusing on the problem of a commodity investor that seeks exposure to the carry, hedging pressure, momentum, skewness, and basis-momentum factors, they demonstrate that the BOI portfolio outperforms not only a battery of parametric style-integrations motivated by the portfolio optimization literature, but also the highly effective equal-weight integrated portfolio. The findings survive the consideration of transaction costs, alternative commodity scoring schemes, and long estimation windows.Read Article
A Trend Factor in Commodity Futures Markets: Any Economic Gains from Using Information over Investment Horizons?
Research by Yufeng Han, Ph.D., Belk College of Business, University of North Carolina at Charlotte; and Lingfei Kong, Ph.D., Olin School of Business, Washington University in St. Louis
This paper identifies a trend factor that exploits the short-, intermediate-, and long-run moving averages of settlement prices in commodity futures markets. The trend factor generates statistically and economically large returns during the post-financialization period 2004-2020. It outperforms the well-known momentum factor by more than nine times the Sharpe ratio and has less downside risk. The trend factor is not encompassed by extant factors and is priced cross-sectionally. An analysis of macroeconomic and other market-wide drivers suggests that this trend factor is stronger in periods of low funding liquidity as measured by the TED spread. Overall, the results indicate that there are significant economic gains from exploiting the information content of long histories of commodity futures prices.Read Article
The Hedging Pressure Hypothesis and the Risk Premium in the Soybean Reverse Crush Spread
Research by Ziran Li, Ph.D., School of Public Finance and Taxation, Southwestern University of Finance and Economics, Chengdu Sichuan, China; and Dermot Hayes, Ph.D., Department of Economics and Finance, Iowa State University
This article develops a theory of multiproduct hedging which serves to formalize Keynes’s hedging pressure hypothesis that the need to attract speculative capital to match hedgers’ trades creates a difference between the futures and expected maturity price. The authors test the theory empirically in the context of the soybean complex which has speculators and hedgers in soybeans, soybean meal and soybean oil. The focus is on the crush spread because it is unlikely that hedgers will want to make simultaneous trades on the opposite side of soybean crushers in all three markets. The findings reveal that there is a significantly positive return to speculators for providing this liquidity.Read Article
|Contributing Editor's Section|
Commodities, Crude Oil, and Diversified Portfolios
By Hilary Till, Contributing Editor, Global Commodities Applied Research Digest; Solich Scholar, J.P. Morgan Center for Commodities (JPMCC), University of Colorado Denver Business School
With concerns on inflation flaring up, there has been renewed interest in potentially including commodities in diversified portfolios. This article builds off prior research in examining which commodities to include and in what size. After briefly reviewing the relevant literature, the article proposes a novel and uncomplicated portfolio solution, which takes into consideration both historical results and plausible new paradigms. In addition, an investor would be able to implement this portfolio solution through deeply liquid futures markets.Read Article
|Editorial Advisory Board Analyses|
China Natural Gas Domestic Production and Imports Reached Record-High in 2021 but Declined in 2022
By Faouzi Aloulou, Senior Industry Economist, U.S. Department of Energy, Energy Information Administration (EIA) and Editorial Advisory Board Member, Global Commodities Applied Research Digest; and Victoria Zaretskaya, Lead Industry Economist, U.S. Department of Energy, Energy Information Administration
In 2021, an average 35.5 billion cubic feet per day (Bcf/d) of natural gas was consumed in China, more natural gas than in any previous year. More than half of the natural gas consumed in China in 2021 came from domestic production, but China also imported record amounts of natural gas by pipeline and as liquefied natural gas (LNG), surpassing Japan as the largest LNG importer for the first time, based on data from Global Trade Tracker and China’s General Administration of Customs. After becoming the world’s largest LNG importer in 2021, China reduced its LNG imports by approximately one-third in the first seven months of this year. LNG imports in China have decreased this year for the first time since 2015. The decline in LNG imports was driven in part by the slower economic growth, high spot LNG prices, robust growth in hydro and non-hydro renewable power generation that displaced more expensive gas-fired power-generation, as well as government policies, which this year reprioritized supply security and economic stability over emissions targets.Read Article
The Effects of Russian Sanctions on Global Commodity and Financial Markets: A GVAR Analysis
By Jennifer Considine, Ph.D., Senior Research Fellow, Centre for Energy, Petroleum and Mineral Law & Policy (CEPMLP), University of Dundee, United Kingdom; and Editorial Advisory Board Member, Global Commodities Applied Research Digest
The author uses a GVAR model to forecast the response of the global economy to Russian sanctions, and a continuation of the Russia-Ukraine War. She finds that the effects of sanctions on Russia and the unintended consequences for Saudi Arabia and European allies depend on the type of sanctions, i.e., whether they are trade sanctions targeting Russian oil production or financial sanctions targeting Russian GDP. The author also finds that sanctions targeting Russian oil flows are inflationary but have fewer unintended consequences for global equity markets. Financial sanctions are more effective, with fewer adverse implications for global inflation levels. The article’s analyses also indicate that possible Russian measures to preempt further Western sanctions by implementing trade embargoes of products including natural gas and oil of their own will be counterproductive for the Russian economy.Read Article
Blockchain Decentralized Clearing of Environmental Credits
By Deborah Cernauskas, Ph.D., Professor of Business Analytics and Finance, Benedictine University (Retired); Steve Josephs, PE, Consultant on Alternative Energy Projects; and Andrew Kumiega, Ph.D., Assistant Professor of Analytics, Illinois Institute of Technology, Stuart School of Business
The focus of this research is commoditizing environmental credits into standardized units by guaranteeing the provenance of the credit through the application of blockchain technology. The commoditization occurs by creating a decentralized clearing process using blockchain for the environmental credit market. The cleared standardized commodity units can then potentially be traded without the risk of rejection by the U.S. Environmental Protection Agency (EPA) because of production fraud or errors. The removal of the rejection risk would allow for small farmers, municipal wastewater plants and landfills to enhance their profitability by producing green electricity from biogas and receiving market tradable environmental credits. The complexity of the pathway requires blockchain, which creates an immutable ledger holding production and distribution data for the environmental credit. This immutable ledger supplies provenance that can eliminate counterparty risk when combined with the concept of decentralized clearing of the credits.Read Article
Risk Premia in Commodity Futures Markets – An Out-of-Sample Test
By Rajkumar Janardanan, SummerHaven Investment Management
The authors of the comprehensive paper document the properties of the first diversified commodity futures index introduced by the Dow Jones & Company in 1933 and use its live track record to study the properties of the asset class in an experimental setting that does not suffer from backfill, selection, or survivorship biases. Despite the setbacks posed by contract failure and trading suspensions of several index constituents, the index appreciated by 3.7% per year between 1933 and 1998, while an investment in collateralized front-month futures returned 4.5% in excess of the risk-free rate. The authors quantify the impact of trading suspensions and contract failure on estimates of the risk premium.Read Article
Oceans of Grain
By Scott Reynolds Nelson, Ph.D., Professor, Georgia Athletic Association Professor, University of Georgia
This article provides a summary of Professor Scott Reynolds Nelson’s latest book, “Oceans of Grain.” To understand the rise and fall of empires, … [one] must follow the paths traveled by grain—along rivers, between ports, and across seas. In “Oceans of Grain,” the author reveals how the struggle to dominate these routes [has] transformed the balance of world power.Read Article
|Interview with a Leading Innovator and Thought Leader|
Interview with Colin Waugh, Editorial Advisory Board Member, Global Commodities Applied Research Digest
Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest
We are delighted to interview Colin Waugh, who is a commodity researcher and investor. Mr. Waugh spent much of his career in the commodity investment industry, in fund management, research and trading. Formerly, he was a Partner, Portfolio Manager and Head of Research in the New York firm of Galtere Ltd, a $2.5bn commodity-based global macro fund.
In this issue’s interview, Colin discusses his extensive career, his recent GCARD article, changes in the industry, African influences, digitization in developing markets, and his advice to young commodity professionals.Read Interview