Winter 2022

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.