How does a commodity market adjust to a temporary scarcity shock which causes a shift in the slope of the futures price curve? We find long-run relationships between spot and futures prices, inventories and interest rates, which means that such shocks lead to an adjustment back towards a stable equilibrium. We find evidence that the adjustment is somewhat consistent with well-known theoretical models, such as Pindyck (2001); in other words, spot prices rise and then fall, while inventories are used to absorb the shock. Importantly, the pace and nature of the adjustment depends upon whether inventories were initially high or low, which introduces significant nonlinearities into the adjustment process.I. INTRODUCTION The relationship between commodity spot and futures prices reflects, in part, the perception of short-term ... anticipate relative abundance (an upward sloping curve) or scarcity (a flat or downward sloping curve) in the physical market. ... In the event of a short-run shock, is there such a thing as a a normala commodity market back towards which spot and futures prices and inventories adjust over time? How does a commodity market adjust to a temporary scarcity shockanbsp;...
|Title||:||How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock|
|Author||:||Ms. Nese Erbil, Shaun K. Roache|
|Publisher||:||International Monetary Fund - 2010-09-01|