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On the behavior of commodity prices when speculative storage is bounded

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  • Oglend, Atle
  • Kleppe, Tore Selland

Abstract

This paper investigates the implications of bounded speculative storage, storage bounded from below at zero and above at a capacity, on commodity prices. Binding capacity mirrors the non-negativity constraint on storage and leads to negative price spiking and higher volatility when the market is in deep contango, i.e. low current prices at high stock levels. With bounded storage there is no need to restrict storage to be costly to ensure a rational expectations equilibrium. This allows the model to cover a wide range of storage technologies, including free and productive storage. We also provide an alternative expression for speculative prices that highlights the key role of the storage boundaries. The competitive equilibrium price is the sum of discounted future probability weighted boundary prices. The boundary prices can be viewed as dividends on commodities in storage reflecting the realization of economic profits from storage.

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  • Oglend, Atle & Kleppe, Tore Selland, 2017. "On the behavior of commodity prices when speculative storage is bounded," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 52-69.
    • Handle: RePEc:eee:dyncon:v:75:y:2017:i:c:p:52-69
    DOI: 10.1016/j.jedc.2016.11.007
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    Cited by:

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    4. Nicolas Legrand & Christophe Gouel, 2022. "The Role of Storage in Commodity Markets: Indirect Inference Based on Grains Data," Working Papers hal-03809825, HAL.
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    8. Tore S. Kleppe & Atle Oglend, 2019. "Can limits‐to‐arbitrage from bounded storage improve commodity term‐structure modeling?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(7), pages 865-889, July.
    9. Muhammad Imran Chaudhry & Mario J. Miranda, 2024. "Endogenous price fluctuations: Evidence from the chicken supply chain in Pakistan," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(2), pages 637-658, March.

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    More about this item

    Keywords

    Q02; Q11; Keywords:; Commodity prices; Storage; Capacity; Rational expectations;
    All these keywords.

    JEL classification:

    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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