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The Dynamics of Commodity Spot and Futures Markets: A Primer

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  • Robert S. Pindyck

Abstract

I discuss the short-run dynamics of commodity prices, production, ami inventories, as well as the sources and effects of market volatility. I explain how prices, rates of production, and inventory levels are interrelated, and are determined via equilibrium in two interconnected markets: a cash market for spot purchases and sales of the commodity, and a market for storage. I show how equilibrium in these markets affects and is affected by changes in the level of price volatility. I also explain the role and behavior of commodity futures markets, and the relationship between spot prices, futures prices, and inventory behavior. I illustrate these ideas with data for the petroleum complex - crude oil, heating oil, and gasoline - over the past two decades.

Suggested Citation

  • Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, , vol. 22(3), pages 1-29, July.
    • Handle: RePEc:sae:enejou:v:22:y:2001:i:3:p:1-29
    DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-1
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, December.
    2. James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 481-510.
    3. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    4. repec:aen:journl:1998v19-01-a05 is not listed on IDEAS
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    Cited by:

    1. Karolina Safarzynska & Taras Kryvyy, 2025. "Integrating metals and minerals into climate-economic models: a review," Climatic Change, Springer, vol. 178(7), pages 1-23, July.
    2. Maples, Joshua G. & Brorsen, B. Wade, 2017. "Time Series Modeling of Cash and Futures Commodity Prices," 2017 Conference, April 24-25, 2017, St. Louis, Missouri 285865, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    3. Chen, Yan & Bouri, Elie & Zhang, Lei, 2025. "Dynamics of co-bubble networks across commodity futures prices and portfolio performance," Energy Economics, Elsevier, vol. 150(C).
    4. repec:ocp:ppaper:pb-1735 is not listed on IDEAS
    5. Mensi, Walid & Brahim, Mariem & Hammoudeh, Shawkat & Tiwari, Aviral Kumar & Kang, Sang Hoon, 2024. "Time-varying causality and correlations between spot and futures prices of natural gas, crude oil, heating oil, and gasoline," Resources Policy, Elsevier, vol. 93(C).
    6. Ellwanger, Reinhard, 2025. "The tail risk premium in the oil market," Energy Economics, Elsevier, vol. 141(C).
    7. Dias, Marco Antonio Guimarães & Borges, Roberto Evelim Penha, 2025. "Valuing oil reserve volumes under price uncertainty," Journal of Economics and Business, Elsevier, vol. 137(C).
    8. Kang, Minseong & Lee, Seungki, 2025. "Navigating the Soybean Market Shift: River Transport as a Lens on the Renewable Diesel Boom," 2025 AAEA & WAEA Joint Annual Meeting, July 27-29, 2025, Denver, CO 360603, Agricultural and Applied Economics Association.
    9. Halder, Abhishek & Kannadhasan, M., 2025. "Energy uncertainty and corporate bankruptcy risk: International evidence," Energy Economics, Elsevier, vol. 151(C).
    10. Yao, Wei, 2025. "The US Quantitative Easing Monetary Policy and Commodities’ Prices," Other publications TiSEM 185d14d3-9dc2-4276-82ec-e, Tilburg University, School of Economics and Management.
    11. Tarufelli, Brittany & Gibson, James & Barrows, Sarah & Somani, Abhishek & Boff, Daniel, 2025. "The Value of Hydropower as a Grid-Scale Storage Resource: A Commodity Market Approach," SocArXiv bm5jf_v1, Center for Open Science.
    12. You‐How Go & Wee‐Yeap Lau, 2023. "What do we know about informational efficiency? Three puzzles and the new direction forward," Journal of Economic Surveys, Wiley Blackwell, vol. 37(4), pages 1489-1525, September.
    13. Siyue Zheng & Mingdong Xu & Min Zhu, 2025. "Generalized Modeling of Oil Futures Volatility Through Uncertainty Indicator Selection: A GARCH–MIDAS–AES Framework," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(9), pages 1182-1201, September.
    14. repec:ocp:ppaper:pb-16/01 is not listed on IDEAS
    15. Vatsa, Puneet & Miljkovic, Tatjana & Miljkovic, Dragan, 2024. "Price discovery redux—Analyzing energy spot and futures prices using a dynamic programming approach," Energy Economics, Elsevier, vol. 140(C).
    16. repec:ocp:rpaper:pp-15/14 is not listed on IDEAS
    17. Yves Jégourel, 2017. "Trop haut, trop vite, trop fort ? L’envolée du prix des minerais et des métaux en question," Policy briefs on Commodities & Energy 1715, Policy Center for the New South.
    18. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R. & Smith, Aaron, 2024. "Was Allen Paul Right? Liquidation Bias in Commodity Futures Markets," 2024 Conference, April 22-23, 2024, St. Louis, Missouri 379013, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    19. Qureshi, Irfan A. & Ahmad, Ghufran, 2025. "Oil price shocks and US business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 177(C).

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