Issues of the
Global Commodities Applied Research Digest

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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This article provides a brief update from Dr. Thomas Brady on the many events and initiatives that have taken place this year, including (a) the addition of four new Industry Advisory Council members; (b) the appointment of four new GCARD Editorial Advisory Board members; (c) the Center’s outreach & applied research, which has included energy transition webinars with the Commodity Trading Alumni Association (of Geneva, Switzerland); (d) the redesign of graduate and undergraduate courses; (e) the JPMCC’s professional education courses, including the Center’s partnership with Erasmus University Rotterdam in the “Leadership in Commodity Trading & Supply Networks” Executive Program; and (f) the JPMCC’s 5th Annual International Commodities Symposium. The symposium, in turn, was co-organized by Dr. Jian Yang, CFA, the JPMCC’s Research Director, and Dr. Brady with Erica Hyman, the JPMCC’s Assistant Director, providing logistical coordination.

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By Thomas Brady, Ph.D., CoBank Executive Director, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Managing Director and Editor, Commodities Report, Capitalight Research, Canada

This digest article provides an overview of the global lithium supply chain from the mining of ore through the processing of intermediate compounds to the manufacture of lithium-ion batteries. Driven by increasing global demand for batteries, the search for new mine supply sources and processing techniques alongside the evolution of battery chemistries, this supply flow is guaranteed to change in the future.

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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

In this report, Dr. Jian Yang provides updates about recent JPMCC research activities. In particular, Dr. Yang discusses (a) the JPMCC’s closer collaboration with the World Bank on applied commodity research; (b) a study investigating the price discovery function of China’s crude oil futures contracts; (c) media interviews on commodity prices and inflation; and (d) the JPMCC’s 5th Annual International Commodities Symposium.

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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 put in context how the oil markets responded to the Omicron news shock in late November 2021, noting how the markets followed a pattern seen on other event risk days. They also provide useful real-time metrics for interpreting a market’s response during eventful periods.

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Research by Ana-Maria Fuertes, Ph.D., Bayes Business School, City, University of London, U.K. and Associate Editor of the GCARD; Zhenya Liu, Ph.D., Renmin University, China; and Weiqing Tang, Ph.D., Senior Quantitative Risk Management Associate, CME Group Inc., U.K.

This paper investigates the predictive content of a risk-neutral skewness (RNSK) signal for the dynamics of commodity futures prices. A trading strategy that buys futures with positive RNSK and sells futures with negative RNSK generates a significant excess return, which suggests a positive RNSK-return nexus. The risk premia that can be extracted through the RNSK signal is more pronounced in the contango than backwardation phase. After accounting for traditional commodity futures predictors, the RNSK signal exhibits a relatively stable and prolonged predictive ability. The directional-learning hypothesis is able to rationalize the positive nexus in terms of arbitrage risks and illiquidity (positive RNSK) and overpricing (negative RNSK).

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By Qunzi Zhang, Ph.D., Shandong University, China

This paper shows that rare disaster concern, defined as the news-implied volatility, performs very well at predicting the return of index commodity futures throughout the whole nearly century period of 1926 to 2016. This result holds after controlling for the current business cycle conditions, the macroeconomic variables, and the Volatility Index (VIX). The paper finds that rare disaster concern performs very well at predicting index commodity futures returns out-of-sample. The results remain robust while considering different macroeconomic conditions such as recession (expansion), contango (backwardation), or increased (decreased) inflation.

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By Sulian Lizé, Ph.D., Research Economist, LMC International

This research explores the reasons behind the low financial development (materialized by the use of derivatives trading) of the rice market, unique within the realm of large commodity markets. Through a comparison with crops with highly liquid futures markets (coffee, sugar and wheat), this article argues that the low financial development of rice is not due to one impeding factor but the accumulation of many instead. Of these, the most prominent are the disincentives for the participation of financially sophisticated actors, and the politicization of rice. The author argues that both factors find their root in the geographical organization of the market, which is highly concentrated in developing economies.

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By Adam Zaremba, Ph.D., Montpellier Business School, Montpellier, France and Poznan University of Economics and Business, Poland; Robert Bianchi, Ph.D., Griffith Business School, Griffith University, Australia; and Mateusz Mikutowski, Ph.D., Poznan University of Economics and Business, Poland

This study examines the long-term reversal effect in commodity spot markets using seven centuries of data. The research is the longest study of the long-term reversal effect covering 52 agricultural, industrial and energy markets from 1265 to 2017 employing U.K.- and U.S.-based commodity prices. Returns over the previous one-to-three years negatively predict subsequent performance in the cross-section of returns. The long-run reversal effect is strong and robust after surviving a variety of robustness checks. The effect cannot be explained by statistical biases, extreme events, or macroeconomic risks. The study reveals that the long-run reversal effect is driven by supply-and-demand adjustments in physical commodities through time.

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By Nic Johnson, Former Head of Commodities at PIMCO and Member of the JPMCC’s Advisory Council; and Klaus Thuerbach, Co-Chief Investment Officer at Klima Capital Advisors

This article discusses potential opportunities in California’s cap-and-trade carbon emissions market. It discusses how cap-and-trade works, California’s Carbon Allowances (CCAs), as well as Environmental, Social and Governance (ESG) considerations of CCA investing. The article also provides two valuation methods and an outlook for the California carbon allowance market.

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By Colin Waugh, Editorial Advisory Board Member, Global Commodities Applied Research Digest

The author discusses how a new economic and political reality has engulfed Europe, its populations, policy makers and larger economic actors, regionally as well as internationally, as a result of the outbreak of major conventional warfare on the European continent for the first time in over 80 years. The situation has required a radical re-ordering of resource allocation, with concomitant shocks to corporate, public and personal finances that this will inevitably entail.

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By Robert Barsky, Ph.D., Senior Economist and Economic Advisor, Federal Reserve Bank of Chicago; Craig Epstein, Research Assistant, Reserve Bank of Chicago; Adrian Lafont-Mueller, Senior Analyst, Federal Reserve Bank of New York; and Younggeun Yoo, Ph.D. Candidate in Economics, University of Chicago

A half century after gold ceased to play a significant formal role in the international monetary system, it still captures a great deal of attention in the financial press and the popular imagination. Yet there has been very little scrutiny of the primary factors determining the price of gold since its dollar price was first allowed to vary freely in 1971. In this article, the authors attempt to fill in that gap by highlighting three considerations that are commonly cited as drivers of gold prices: inflationary expectations, real interest rates, and pessimism about future macroeconomic conditions.

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By Thomas Blackburn, Ph.D., Senior Risk Analyst, Northfield Information Services; Dan DiBartolomeo, Founder and President, Northfield Information Services; and William Zieff, Director, Northfield Information Services

In this article, the authors note that it is necessary to have methods in place to assess the risk of holding cryptocurrencies and the incremental impact of crypto holdings on overall institutional portfolios. The main portion of their research focuses on key building blocks for understanding the risk of cryptocurrencies and what magnitude of return expectations would justify those risks for a typical investor.

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By Michael Nepveux, Senior Protein Analyst, Stable Group Ltd; Paola Luporini, Senior Analyst, Stable Group Ltd; Sam Horsfield, Grains Analyst, Stable Group Ltd; Sakshi Mehta, Junior Analyst, Stable Group Ltd; and Joe Brooker, Vice President, Research, Stable Group Ltd

Stable’s research covers the widespread issue of “basis” and “flat price” risk within the agricultural commodities sector. This article defines the term “basis” to describe the difference between a cash market price and the corresponding futures market price with “flat price” risk defined as the risk where the market operator is exposed to the full spot price of a commodity. The article drills into the level of coverage that liquid futures contracts offer in the agricultural commodity markets and highlights the shortcomings in the sector. Overall, Stable finds that only 16% of global agricultural commodity markets are covered by liquid futures markets. This provides a significant issue for risk management in the sector with widespread “basis” and “flat price” risk occurring. A case study on the organic corn market highlights the challenges of price risk management in a relatively new product within the market where no exchange-traded contract exists. This is in contrast with the conventional corn market, which has some of the most established futures contracts in the agricultural commodities sector. Another case study examines the recent price volatility in beef, which was caused by plant closures during the COVID-19 pandemic. The move in prices has disrupted the once tightly knit relationship between the Chicago Mercantile Exchange (CME) live cattle futures and the price of beef, leaving industry participants without a suitable hedging tool for their price exposure. Stable concludes that the market is in need of a modern, targeted solution for the age-old problem of “basis” and “flat price” risk within the agricultural commodities sector.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this issue of the GCARD, we are delighted to interview Sharon (Hyman) Weintraub, who is the Senior Vice President for Gas and Power Trading International at bp. Weintraub’s career spans commodity derivatives trading, risk management, and chief financial officer duties in positions across the globe, including in Chicago, Houston, London, and Singapore. She is also a member of the JPMCC’s prestigious Advisory Council.

In this issue’s GCARD interview, Weintraub describes her 30+ year career along with her view on the significant changes in the industry that have occurred during her career in the energy markets. She then discusses her current role at bp as well as some of the initiatives of the JPMCC’s Industry Advisory Council. The interview concludes with her advice for students and young professionals interested in a career in the commodities and/or energy markets.

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This article provides a brief update from Dr. Thomas Brady on the many events and initiatives that have taken place this year, including (a) the addition of three new Industry Advisory Council members; (b) two new GCARD Editorial Advisory Board members; (c) the GCARD Best Article Award; (d) the Center’s outreach and collaboration initiatives; (e) the upcoming Spring 2022 academic classes; (f) the “Leadership in Commodity Trading & Supply Networks” Global Executive Programme; (g) the Center’s Professional Education offerings; and (h) a review of the August 2021 international commodities symposium.

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By Thomas Brady, Ph.D., Executive Director, J.P. Morgan Center for Commodities, University of Colorado Denver Business School and Managing Director and Editor, Commodities Report, Capitalight Research, Canada

This article discusses why it is essential to prepare the next generation for lucrative employment opportunities across commodity sectors and notes the skills that students will need for a successful career in commodities.

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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

In this report, Dr. Jian Yang provides updates about recent JPMCC research activities from March 2021 until September 2021. In particular, Dr. Yang discusses (a) the most recent JPMCC international commodities symposium; (b) a study that advances research on commodity futures volatility spillovers; (c) the continuing media attention on the research director’s crude oil and agricultural analyses; and (d) other commodity research publication updates.

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By Michael Adjemian, Ph.D., Associate Professor, Department of Agricultural and Applied Economics, University of Georgia, Athens, GA; Valentina Bruno, Ph.D., Professor of Finance and Kogod Research Professor, Kogod School of Business, American University, Washington, D.C.; and Michel A. Robe, Ph.D., The Clearing Corporation Foundation Professor in Derivatives Trading, College of ACES, University of Illinois, Urbana-Champaign, IL and Member of the JPMCC’s Research Council

The U.S. Department of Agriculture (USDA) produces monthly marketing-season-average price (SAP) forecasts for major U.S. crops that are closely watched by farmers and commodity market participants. For decades, the USDA published SAP forecast ranges whose upper and lower bounds had no statistical significance. In 2019, the USDA switched to publishing monthly single-point SAP forecasts. This paper argues that conducting and publishing density forecasts, or providing intervals based on those densities, would be very valuable to consumers of the SAP forecasts.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

This article notes how one can gain considerable insights into market behavior by searching for asymmetry and irregularities in patterns in the price discovery process and uses the crude oil market as an example. The article is based on the author’s keynote presentation at the JPMCC’s August 2021 international commodities symposium.

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By Xiaoqian Wen, Ph.D., Southwestern University of Finance and Economics, China; Yuxin Xie, Ph.D., Southwestern University of Finance and Economics, China; and Athanasios A. Pantelous, Ph.D., Monash University, Australia; and Edited by Ana-Maria Fuertes, Ph.D., Bayes Business School, City, University of London (U.K.) and Associate Editor of the GCARD

This article studies whether the extreme price co-movement of commodity futures can be exploited to anticipate future industrial production (IP) growth. For this purpose, an empirical model is estimated to derive a measure that characterizes upside and downside price extremes. The derived price extremes are shown to be positively associated with IP growth over the next quarter. The findings further suggest the presence of an asymmetry: the association corresponding to downside extremes is robust whereas that of upside extremes is weaker. The findings reinforce the informational friction theory as well as those financial studies that emphasize downside risk in financial markets.

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By Ilia Bouchouev, Ph.D., Managing Partner, Pentathlon Investments and Member of the GCARD’s Editorial Advisory Board and Brett Johnson, Vice President, Cboe Global Markets

The paper presents selected results from the comprehensive study of the volatility risk premium (VRP) in the oil market. We introduce the smile of VRP that represents variation in profitability and risk of this systematic strategy across option moneyness and maturities. We identify the structural break in VRP evolution over time driven by behavioral changes among producer hedgers and the securitization of the strategy by financial institutions.

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By Gillis Björk Danielsen, Senior Portfolio Manager, APG Asset Management, The Netherlands and Member of the GCARD’s Editorial Advisory Board

In this article, the author describes how to compare the emissions from bitcoin and gold. The calculations are based on the relevant emissions from production, without delving into later lifecycle emissions. The goal is to give investors useful “rules of thumb” for understanding the orders of magnitude at play.

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By Jennifer Considine, Ph.D., Visiting Researcher, King Abdullah Petroleum Studies and Research Center (KAPSARC), Saudi Arabia and Senior Research Fellow, Centre for Energy, Petroleum and Mineral Law & Policy, University of Dundee, United Kingdom; Abdullah Aldayel, Senior Research Analyst, KAPSARC, Saudi Arabia; and Philipp Galkin, Ph.D., Visiting Researcher, KAPSARC, Saudi Arabia

The general theory of storage suggests that the level of inventories is a key factor in determining the basis over time. The basis is the difference between the price of oil in the futures market and the price of oil in the spot market. As an indicator of future price movements, the basis follows a different dynamic when inventories are in scarce supply or in surplus, implying that there are different market states that reflect different underlying crude oil market conditions. We apply a Markov regime switching model to analyze this complex relationship, using a spread option value of storage metric to represent market structure, which enables us to draw preliminary conclusions on how to potentially impact oil-market-price stability via precise inventory decisions.

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By David Fyfe, Group Chief Economist, Argus Media

Early-2021 saw synchronous gains for commodity prices, prompting predictions of an imminent commodity super cycle. Price increases both resulted from, and contributed to, supply-chain bottlenecks and broader price inflation in the world economy. Looking ahead, while cyclical inflation drivers may ease, policy choices on economic regeneration, the energy transition, and the reshoring of manufacturing could raise supply-chain costs on a more structural basis over the longer term. The article is based on the author’s presentation at the JPMCC’s August 2021 international commodities symposium.

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By Christina Adams, Partner, McKinsey & Company; Melanie Lieberman, Engagement Manager, McKinsey & Company; Ludovic Meilhac, Partner, McKinsey & Company; and Roberto Uchoa, Senior Partner, McKinsey & Company

In the early days and months of the COVID-19 pandemic, the dairy industry faced challenges—such as shifts in supply and demand—as food service demand fell and retail demand skyrocketed. However, the industry ultimately emerged intact thanks to adjustments such as portfolio simplification and manufacturing flexibility. The authors explore what the experience was like for the dairy industry, and how executives plan to proceed. The authors recommend that the dairy industry expand the talent pool and ways of working, embrace a “One Health” approach, and establish flexible supply chains that can respond to unexpected disruptions.

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By John Lothian, Founder and Publisher, John Lothian News

This article excerpts from interviews, some of which are colorful, that have taken place during the Open Outcry Traders History Project. This project has sought to capture the stories of open outcry traders before they perish for good and has been modeled after the Veterans History Project, which was signed into law in the 1990s.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this issue of the GCARD, we are delighted to interview Dr. Daniel Jerrett, who is the Co-Founder and Chief Investment Officer at Stategy Capital LP, a global alternative investment management firm. In this interview, Jerrett describes his career along with providing his view on whether we are in another commodities super cycle. He then discusses his involvement with the JPMCC. The interview concludes with his advice for students and young professionals on the commodity industry.

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This article provides a brief update on the many events and initiatives that have taken place during the last six months, including (a) new sponsorship for the GCARD; (b) the addition of a new Industry Advisory Council member; (c) the appointment of two new GCARD Editorial Advisory Board members; (d) the latest JPMCC collegiate courses; (e) the upcoming Professional Education courses that are being offered jointly with the CU Denver Global Energy Management program; and (f) the scheduling of the August 2021 international commodities symposium. The JPMCC’s Executive Director is Dr. Thomas Brady, Ph.D.

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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

In this brief report, Dr. Jian Yang provides updates on the JPMCC’s research activities through February 2021. In particular, Dr. Yang discusses (a) cover story articles in China Futures Magazine, which were written by professionals affiliated with the JPMCC; (b) the Center’s applied research insights, which were cited by the media; and (c) the JPMCC’s upcoming international commodities symposium and other research activities.

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By John Baffes, Ph.D., Senior Agriculture Economist, Prospects Group, World Bank and Member of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board; and Alain Kabundi, Ph.D., Senior Economist, Prospects Group, World Bank

Based on an analysis of 27 commodities during 1970-2019, this article finds that transitory and permanent shocks contributed almost equally to commodity price variations, although with wide heterogeneity. Permanent shocks accounted for two-thirds of the variability in annual agricultural commodity prices but less than half of the variability in base metals prices. For energy prices, permanent shocks have trended upward, for agricultural prices, downwards, and for metals prices, flat. The volatility triggered in April-to-October 2020 by the COVID-19 pandemic appears to constitute a series of largely transitory shocks for commodity prices.

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Research by Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K. and Associate Editor of the GCARD; and Joëlle Miffre, Ph.D., Audencia Business School, France

WTI crude oil futures markets experienced the unprecedented phenomenon of negative prices on April 20, 2020. Several energy market pundits attributed the event to the large United States oil exchange-traded fund (“USO”) due to the rolling of positions out of the May 2020 contract (CLK20) before the contract’s maturity on April 21, 2020. The authors show empirically that USO flows have not influenced the flat price of WTI futures in general, nor of the CLK20 contract in particular.

A blend of macroeconomic/geopolitical conditions, including the sudden demand plunge associated with COVID-19 pandemic-control measures and various supply spikes due to Russia-Saudi Arabia tensions, contributed to a contangoed WTI futures curve that attracted cash-and-carry (C&C) arbitrage, sharply increasing the inventories at Cushing, and feeding into a super-contango, as concerns on storage capacity loomed. That said, a full understanding of the negative WTI price phenomenon of April 20, 2020 will require a formal examination of market microstructure issues on that day.

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Research by Amor Aniss Benmoussa, Economist, Bank of Canada; Reinhard Ellwanger, Ph.D., Senior Economist, Bank of Canada; and Stephen Snudden, Ph.D., Assistant Professor, Wilfrid Laurier University, Canada

The authors propose a new benchmark to evaluate forecasts of averaged series, such as the monthly real price of oil. The new benchmark is based on the last high-frequency observation of the underlying series and allows forecasters to test for predictability. The authors also warn that forecast comparisons with the conventional benchmark can introduce spurious predictability. In an application to the real price of crude oil, the authors find that the new benchmark overturns the existing evidence for oil-price predictability: the real price of oil is more difficult to predict and behaves more similar to the prices of financial assets than implied by the academic literature. The authors’ results also highlight that incorporating information from high-frequency observations into forecasting models can yield large gains in forecast-accuracy. Such gains are likely to occur in any setting where forecasters work with averaged data and the underlying series are very persistent.

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Research by David S. Jacks, Ph.D., J.Y. Pillay Professor of Social Sciences, Yale-NUS College, Singapore, Professor, Simon Fraser University, Canada and Member of the GCARD’s Editorial Advisory Board; and Martin Stuermer, Ph.D., Senior Research Economist, Federal Reserve Bank of Dallas

This paper evaluates the dynamic effects of fuel price shocks, shipping demand shocks, and shipping supply shocks on real maritime transport costs in the long run. The authors first analyze a new and large dataset on dry bulk freight rates for the period from 1850 to 2020, finding that they followed a downward but undulating path with a cumulative decline of 79%. Next, the authors turn to understanding the drivers of booms and busts in the dry bulk shipping industry around this trend, finding that shipping demand shocks strongly dominate all others as drivers of real dry bulk freight rates. Furthermore, while shipping demand shocks have increased in importance over time, shipping supply shocks in particular have become less relevant.

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By Kartik Ghia, Ph.D., Co-Head of the Systematic Strategies Team, Index and ESG Research Group, Bloomberg LP and Member of both the JPMCC’s Advisory Council and the GCARD’s Editorial Advisory Board; A.J. Lindeman, Ph.D., Head of the Index and ESG Research Group, Bloomberg LP; and Michael Zhang, CFA, Quantitative Analyst, Index and ESG Research Group, Bloomberg LP

In recent years, environmental, social and governance (ESG) themes have rapidly risen to prominence within equities and fixed income. In commodities however, this discussion is still in its infancy. In this article, the authors (a) highlight the unique interpretation issues for commodities investors with regard to ESG investing; (b) provide a summary of the factors that need to be considered when estimating GHG emissions for metals production; (c) outline a rules-based approach for estimating GHG emissions per metal; and (d) construct sample portfolios incorporating GHG-based scores.

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By Daniel Jerrett, Ph.D., Chief Investment Officer, Stategy Capital LP and Member of the JPMCC’s Advisory Council

The reemergence of the commodity super-cycle discussion has important implications for the global economy and capital markets. Mineral producers, policymakers, and investment managers are all trying to better understand commodity prices to make more informed, long-term decisions. The author proposes a statistical methodology that could help support this decision-making process and provide a framework to discuss super cycles in commodities as well as other macroeconomic and financial questions.

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By Daniel Murray, Ph.D., Deputy Chief Investment Officer and Global Head of Research, EFG Asset Management, U.K. and Member of the GCARD’s Editorial Advisory Board

There are several commonly held beliefs in the investment community regarding the relationship between gold and other variables: namely, the U.S. dollar, the 10-year Treasury yield, the oil price, inflation and market volatility or risk. At the same time, we know that central banks have adopted widespread large-scale asset purchase programs during and since the period that began with the Global Financial Crisis (GFC) in 2008/09, over which time monetary authority balance sheets expanded at a dramatic rate. This paper explores the nature of the relationships between gold and the other variables before and after the GFC in this context. The paper shows that the relationships have indeed changed since the GFC in terms of both significance and direction of causality.

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By Thomas Brady, Ph.D., Executive Director, J.P. Morgan Center for Commodities, University of Colorado Denver Business School and Managing Director and Editor, Commodities Report, Capitalight Research, Canada; and Chantelle Schieven, Managing Director and Research Head, Capitalight Research, Canada

This article provides a broad sweep review of both the long-term trends in global silver mining supply and in global silver supply concentration. The authors anticipate mine supply growth to remain very challenged. Lower processed grades, which in turn result from longer-term downward trends in exploration success, will pressure operating costs as well as production levels. Over the near term, COVID-19 restrictions will also potentially impact production levels going forward. The authors also anticipate industry concentration levels to marginally increase in both silver and gold mine supply. As a consequence of the continuing mining challenges of lower processing grades and limited exploration success, the authors expect that companies will be forced to look towards mergers-and-acquisitions to sustain production profiles.

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By Nick Vasserman, Founder and Chief Investment Officer, Integrated Portfolio Intelligence, LLC

Historically speaking, commodities balance sheet entries were not observable in a timely fashion. Lagged data is typically published by government agencies and often substantially revised in later releases. This lack of uniformity severely hinders the efforts to gauge international commodities balances and determine individual commodity valuations. Further complicating this effort are the different accounting standards and principles adopted by different agencies and analysts.

This paper proposes that in today’s information age, it is possible and necessary to construct a globally consistent investment framework that integrates all available fundamental data and technology into dynamic stocks-to-use ratios to assess commodity valuations in near real-time.

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By Nazim Osmancik, Energy Risk Management Expert

Low carbon power generation is gaining market share in many key markets around the world. Underpinned by displacing traditional thermal power generation with renewables like wind and solar, this trend introduces supply intermittency that drives new pricing patterns and changes the profile of risk. The scale and complexity of the intermittency challenge will increase as the share of renewable generation rises in energy systems. Understanding these challenges are key to investment, strategy, and policy decisions. This article explores these trends using evidence from the U.K. power market, followed by a discussion on future implications and recommendations.

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By Vincent Almering, Group Treasurer, Interfood Holding B.V., The Netherlands; Herbert Rijken, Ph.D., Full Professor in Corporate Finance, Vrije Universiteit Amsterdam, The Netherlands; and Frans Cleton, Senior Manager, KPMG Advisory, The Netherlands and Program Manager and Instructor, Postgraduate Program, Treasury and Corporate Finance, Vrije Universiteit Amsterdam, The Netherlands

Commodity prices are subject to extreme price volatility and are a prominent source of risk for treasurers. The current geopolitical uncertainty is one of the main causes behind the recent uptick in volatility in many markets, complicating the ability of a treasurer to manage risk. Inevitably, the dairy sector is also affected by these developments and is on the lookout for more advanced market risk management tools. One promising tool is volatility modeling. This paper focuses on how volatility modeling can benefit commodity traders by dynamically managing price risk in the European Union (EU) dairy market with time series models.

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By Vito Turitto, Lead Quantitative Analyst, S&P Global Platts, U.K.

This article expands on research into commodity portfolio management that was published in the Winter 2019 edition of the Global Commodities Applied Research Digest. Commodity markets are often used to diversify portfolio risk and as a hedge against inflation but, in order to maximize returns and hedging effectiveness, it is necessary to develop an approach that examines each commodity market separately. Accordingly, this article analyzes individual commodity returns and provides guidance on how extreme returns can impact commodity portfolio strategies.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this issue of the GCARD, we have the pleasure of interviewing Jodie Gunzberg, CFA. Gunzberg is the Managing Director and Chief Institutional Investment Strategist for Morgan Stanley Wealth Management. Previously Gunzberg was the Managing Director and Head of U.S. Equities at S&P Dow Jones Indices (S&P DJI). She had originally joined S&P DJI as the Director of Commodities product management. In addition to her impressive track record of professional achievement, Gunzberg has retained a strong passion for education, whether it concerns early-childhood tutoring, university-level mentoring, or professional development for young finance professionals. In this interview, we ask Gunzberg about advice regarding career development, and we also explore both commodity- and education-based themes with her as well.

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This article provides a brief update on the many events and initiatives that have taken place this year, including (a) the appointment of additional Industry Advisory Council members; (b) the selection of the JPMCC’s new Program Manager; (c) the Center’s global outreach efforts; (d) our expanded academic class offerings; (e) the JPMCC’s professional education efforts; (f) the upcoming collaboration with Erasmus University Rotterdam; and (g) our plans for next year’s international commodities symposium.

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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

In this brief report, Dr. Jian Yang, the JPMCC’s Research Director, provides updates on the JPMCC’s research activities through the fall of 2020. In particular, Dr. Yang discusses (a) his cowritten study which advances research on the price discovery function of commodity futures markets; (b) the Center’s forthcoming featured articles in China Futures Magazine; and (c) the JPMCC’s international commodities symposium and other research activities.

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By John Baffes, Ph.D., Senior Agriculture Economist, Prospects Group, World Bank and Member of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board

The article discusses the uneven impact of the COVID-19 pandemic across the commodity market sectors. The author concludes that COVID-19’s impact on energy markets is likely to leave a permanent scar while the impact on other commodity markets will likely be transitory. In particular, the pandemic is likely to induce some longer term impacts on commodity markets, including lower oil consumption, changes in the cost of transport, unwinding of supply chains, and, in the longer term, substitution among commodities due to changes in consumer preferences.

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Research by John Hua Fan, Ph.D., Griffith Business School, Griffith University, Australia and Member of the GCARD’s Editorial Advisory Board; Di Mo, Ph.D., School of Economics, Finance and Marketing, RMIT University, Australia; and Tingxi Zhang, Griffith Business School, Griffith University, Australia

This paper investigates the impact of enormous capital inflows into commodity futures markets in China. Mimicking the positions of both passive long and systematic long-short speculators, the study finds increased speculation does not give rise to higher volatilities and co-movements, nor distorts the market’s association with economic fundamentals. Moreover, long-short speculators who trade on commodity fundamental information contribute positively to price discovery by reducing the broad market volatility and cross-correlation with stocks. Overall, intensified speculation did not have an adverse impact on the broad Chinese commodity futures market.

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Summarized by Hilary Till, Solich Scholar, J.P. Morgan Center of Commodities, University of Colorado Denver Business School and Principal, Premia Research LLC

A number of empirical studies, mainly from academic researchers, have been crucial in the debate on the economic role of futures trading. This article briefly summarizes the literature covering these influential studies with a focus on agricultural futures contracts, financial futures contracts, and the transparency of data.

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By Natasha Kaneva, Executive Director, Head of Global Commodities Strategy, J.P. Morgan; and Gregory Shearer, Vice President, Global Commodities Research, J.P. Morgan

Base metals prices have fully unwound the +20% lockdown-driven 1Q20 sell-off as metals-intensive Chinese stimulus measures have driven a sharp V-shaped recovery in demand. We expect Chinese metals demand to remain strong until China’s credit cycle peaks somewhere in 3Q21 but recent signs of overheating in the property sector, a major driver of end-use metals consumption in the country, have raised some red flags. Past performance shows that a reluctance to stimulate the housing market in China can weigh heavy on base metals prices, even if other sectors like infrastructure and manufacturing remain supported. While property investment remains strong for now, too much of a good thing can have future consequences and the evolution of property policy in the coming months bears watching given the potential drag it could add to the base metals sector.

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By Ilia Bouchouev, Ph.D., Managing Partner, Pentathlon Investments and Member of the GCARD’s Editorial Advisory Board; and Lingchao Zuo, Senior Quantitative Analyst, National Grid

Systematic commodity risk-premia strategies have been popular among asset allocators and extensively studied by researchers. It is not as widely known, though, that the disproportionally large share of returns in such diversified commodity portfolios is attributed to energy futures. We show that even simple signals supported by the economics of oil storage and transportation arbitrage generate superior returns when applied to oil futures alone. The challenge is to be mindful of structural regime shifts that are prevalent in oil markets.

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By Greg Sterijevski, Ph.D., Founder, CommodityVol.com; and Andrew Kumiega, Ph.D., Assistant Professor of Analytics, Illinois Institute of Technology, Stuart School of Business

The oil market went through a tumultuous period in early 2020. The price of the West Texas Intermediate Blend hit a peak of over $60 per barrel and then plunged for the first time in history to a negative price for both the front-month futures contract and spot price at Cushing on 4/20/2020. This paper focuses on the apparent stability of the market during this time period and the financial engineering challenges that options and futures traders addressed to ensure the markets remained orderly and operating. The authors provide evidence that the market functioned normally in the face of a negative futures price and the listing of negative strike options. The paper specifically focuses on the difficulties in pricing and hedging of options under the traditional Black option model. The authors then explore two alternative model formulations and comment on their applicability.

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By Nazim Osmancik, Chief Risk Officer, Energy Marketing & Trading, Centrica Plc, U.K.

Forecasts play a vital role in decision-making in the energy sector. Forecasting in the energy sector is a challenging task due to the large number of highly uncertain variables that is typically needed to forecast. On top of this, the energy transition is introducing new uncertainties which elevate the importance of accurate forecasting while making the task more difficult. The paper examines the key forecasting challenges against this backdrop from the perspective of an industry practitioner and introduces a systematic five-step approach to understanding, evaluating, and improving forecasts. Simplified use cases are presented which demonstrate that the five-step approach can generate commercial insights and improvements in forecast performance.

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By Florian Thaler, Co-Founder and CEO, OilX; Juan Carlos Rodrigues, Oil Economist, OilX; and Bert Gilbert, Head of North American Business Development, OilX

The authors note that data may be the New Oil, but oil is only valuable after it has been refined. The same holds true for data. This article looks at how “Nowcasting” techniques are being used to refine geospatial data in order to provide real-time supply-and-demand information to the oil market.

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By Gillis Björk Danielsen, Senior Portfolio Manager, APG Asset Management, The Netherlands

Efficient institutional investment portfolios are exposed to commodity derivatives. Nevertheless, the current lack of coherent industry guidance on the Environmental, Social and Governance (ESG) impact of commodity futures may lead some investors to consider even excluding these assets. In this article the author systematically studies the question, “Can a responsible investor invest in commodity futures?” The article lays out a taxonomy of perceived issues and then proceeds to discuss these issues in light of available guidelines and the relevant academic research. Lastly, the author offers two actions that responsible investors exposed to commodity futures should consider.

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By Thomas Fernandes, Managing Principal of GreenHaven Group, LLC and GreenHaven Advisors; Scott Glasing, Vice President of Trading and Futures Operations, GreenHaven Group, LLC; Douglas Wilson, Commodity Analyst, GreenHaven Group, LLC; Ashmead Pringle, President, GreenHaven Group, LLC; and David Cary, Founder, C&C Ag Consulting, LLC

By trading, modeling, and hedging commodities, the authors learned that commodities are materially impacted by calendar events and seasonality that may not be fully priced into the commodity futures markets until these events approach the maturity of a commodity’s futures contract. The authors discuss how the seasoned commodity expert in a specific sector or commodity must consider these events as catalysts for short and intermediate commodity price moves, which allow for an increased probability of mean reversion in certain time periods and an increased probability of counter-seasonal price trends in other periods. In addition, based on the authors’ historical research, these observations should be useful in improving upon the design of a systematic futures trading system based on mean reversion.

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By Adila Mchich, Director, Research and Product Development, CME Group; and Hilary Till, Solich Scholar, J.P. Morgan Center of Commodities, University of Colorado Denver Business School and Principal, Premia Research LLC

In this brief article, the authors argue that oil-indexation contracts have lost their relevance as oil and gas prices continue to decouple. In addition, the impact of the COVID-19 pandemic has provided further evidence of how this pricing framework has become ever more obsolete and an impediment to market competition and efficiency.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this issue of the GCARD, we have the pleasure of interviewing Mark Keenan. Mr. Keenan is Head of Research and Strategy at Engelhart Commodity Trading Partners (ECTP) and an Editorial Advisory Board Member of the Global Commodities Applied Research Digest. He has over 20 years of experience in commodity quantitative analysis, research and strategy across all the major energy, metal, agriculture and soft commodities markets. He is also the author of two books: Positioning Analysis in Commodities Markets – Bridging Fundamental and Technical Analysis and most recently, Advanced Positioning, Flow and Sentiment Analysis in Commodity Markets.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

The pandemic of 2020 had a major influence on almost every facet of life as the COVID-19 virus wound its way around the world. Commodity markets were impacted as well, yet not in any unifying pattern. Every commodity was influenced differently. In this research, the author looks back at how four selected commodities performed – oil, copper, soybeans, and gold – in 2020, and tries to detangle the influence of the virus from everything else that was happening. It is a conflicted picture, which illustrates the many feedback loops and dynamic aspects of complex systems.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this issue of the GCARD, we are delighted to interview the JPMCC’s new Executive Director, Dr. Thomas Brady. Dr. Brady discusses how he became involved in the commodity markets and what his goals are for the JPMCC. Prior to joining the JPMCC, Dr. Brady was the Chief Economist at Newmont Mining.

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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

In this brief report, Dr. Jian Yang, the JPMCC’s Research Director, provides updates on the JPMCC’s research activities through the spring of 2020. In particular, Dr. Yang discusses the publication of an innovative study on crude oil and notes the continued impact of the 2019 symposium.

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By Gary Mahrenholz, Ph.D., Economist, Office of Enforcement’s Division of Energy Market Oversight, U.S. Federal Energy Regulatory Commission and Vincent Kaminski, Ph.D., Professor in the Practice of Energy Management, Jesse H. Jones Graduate School of Business, Rice University and Member of the JPMCC’s Research Council

This paper is the second in a two-part series. In part 1, which appeared in the Winter 2019 edition of the GCARD, the authors examined different liquidity measures and considered their relevance to the natural gas markets. In the current paper, the authors review unique features of the U.S. natural gas markets and how price formation occurs for various types of natural gas products.

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By Colin M. Waugh, Member of the GCARD’s Editorial Advisory Board

The author observes that 2020 will be a crucial year for both the U.S. and China in stabilizing and redefining their domestic political arrangements as well as in their commercial and political relations with each other. In addition to providing a historical framework for analysis of the past two-plus years of the U.S.-China trade “war,” the author discusses the dispute’s impact on commodity supply chains.

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By Jan-Hein Jesse, Founder, JOSCO Energy Finance and Strategy Consultancy, Netherlands and Member of the GCARD’s Editorial Advisory Board

The author argues that while oil markets should recover from the extreme price lows that have been due to simultaneous supply-and-demand shocks, difficult structural changes will remain for the global oil industry. The author reviews the history of Investment and Exploitation phases in the oil markets, and then notes how this time may be different because of pressures to substitute away from oil, especially in Europe.

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By Mark Keenan, Head of Research and Strategy at Engelhart Commodity Trading Partners and Member of the GCARD’s Editorial Advisory Board

This digest article discusses how machine learning can be applied to studying positioning dynamics in commodities. The article introduces decision trees and random forests as ways of potentially uncovering relationships between changes in positioning and changes in commodity prices.

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By Thomas Babbedge, Ph.D., Chief Scientist and Deputy Head of Systematic Strategies, Gresham Investment Management and J. Scott Kerson, Senior Managing Director and Head of Systematic Strategies, Gresham Investment Management

This paper is the second in a two-part series. In part 1, which appeared in the Winter 2019 edition of the GCARD, the authors explored the reduced performance of trend followers over the past decade. In Part 2, the authors use a novel dataset of alternative commodity markets to show that the “trendiness” of less mainstream markets, selected based on a set of simple criteria, is inherently higher and that trend following in these markets has continued to be significantly better.

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By Tina Marie Reine, Senior Carbon Market Developer – North America, World Fuel Services

The author discusses how sustainability has hit center stage across all economic sectors, including in commodities. Banks are making environmental, social and governance (ESG) issues much more of a priority and are diversifying their offerings to include ESG investment products.

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This article provides a brief update on the many events and initiatives that have taken place since the digest’s last issue, including (a) the appointment of the JPMCC’s Executive Director; (b) the launch of the JPMCC’s Geopolitical Oil Price Risk Index; (c) the Center’s forthcoming newsletters; (d) CU Denver Business School’s expanded commodities curriculum; (e) the Program Director’s recent press interview; and (f) the Research Director’s highly successful international commodities symposium.

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By Jian Yang, Ph.D., CFA, J.P. Morgan Endowed Research Chair, JPMCC Research Director, and Professor of Finance and Risk Management, University of Colorado Denver Business School

In this report, the JPMCC’s Research Director provides updates about the Center’s research activities from January 2019 through August 2019 with the focus on two international commodities conferences organized or co-organized by the Research Director on behalf of the JPMCC. Those conferences, in turn, were the “International Conference on Derivatives Market and Risk Management,” held in Shanghai, China; and the JPMCC’s 3rd Annual International Commodities Symposium, held at the University of Colorado (CU) Denver Business School. Regarding the latter conference, the Research Director especially thanked the CU Denver’s senior leadership team for their support of the JPMCC and its international commodities symposium.

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On March 6, 2019, the JPMCC was honored to host three experts on cryptocurrencies during a panel presentation organized and moderated by the JPMCC’s Program Director, Dr. Yosef Bonaparte. This article recounts the insights of Mr. Bill Sinclair, Dr. Andrei Kirilenko, and Mr. Colin Fenton during their respective presentations.

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By Yosef Bonaparte, Ph.D., JPMCC Program Director and Associate Professor of Finance, University of Colorado Denver Business School

This digest article describes a new research project at the JPMCC: the launch of the Geopolitical Oil Price Risk Index (GOPRX), which is designed to reflect the impact of geopolitics on oil prices, volatility, and supply in one succinct metric.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

In this report, the author delves into the longer-term forces of financial panic, disruptive technology, and trade protectionism to understand why the correlation structure among key commodities may occasionally diverge sharply from its longer-term pattern only to return eventually back to form.

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By Gary Mahrenholz, Ph.D., Economist, Office of Enforcement’s Division of Energy Market Oversight, U.S. Federal Energy Regulatory Commission and Vincent Kaminski, Ph.D., Professor in the Practice of Energy Management, Jesse H. Jones Graduate School of Business, Rice University and Member of the JPMCC’s Research Council at the University of Colorado Denver Business School

This paper is the first in a two-part series. In the current paper, the authors review the definition of liquidity, its importance to market practitioners and policymakers and discuss different measures of market liquidity. In the second part of this series, which will be included in the next issue of the GCARD, the authors will review the unique features of the U.S. natural gas market and how price formation occurs for the various types of natural gas products. This paper will also provide an assessment of liquidity in the U.S. natural gas market.

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By Thomas Brady, Ph.D., Executive Director of the JPMCC and Member of the JPMCC’s Research Council at the University of Colorado Denver Business School

This article provides practitioners seeking to value investments across the commodity sector with practical guidance on how to calculate discount rates and importantly, how to communicate these rates to the many disparate stakeholders within and outside of a firm.

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By Lutz Kilian, Ph.D., Senior Economic Policy Adviser, Federal Reserve Bank of Dallas and Member of the JPMCC’s Research Council and Xiaoqing Zhou, Ph.D., Economist, Federal Reserve Bank of Dallas

This digest article discusses how modeling the relationship between oil prices, exchange rates and interest rates raises some interesting identification challenges. Recent research shows how the workhorse structural oil market VAR model may be modified to overcome these challenges. The resulting structural model sheds light on common conjectures about the determinants of the variability of the real exchange rate, the real price of oil, and the U.S. real interest rate. The model estimates provide a more nuanced understanding of historical oil price fluctuations, but substantively agree with earlier historical narratives.

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By John Hua Fan, Ph.D., Griffith Business School, Australia; Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K.; and Joëlle Miffre, Ph.D., Audencia Business School, Nantes, France

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This digest article examines the information content of futures markets speculators’ net positions. The article shows that long-short portfolios based on speculative pressure capture attractive premia in commodity, equity and currency futures markets. The thus formed speculative pressure factors are able to explain the cross-section variation in futures returns after controlling for tradeable (carry, momentum and value) factors and non-tradeable global macroeconomic factors.

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By John Hua Fan, Ph.D. and Tingxi Zhang, Griffith Business School, Australia

As summarized by John Hua Fan, Ph.D., Griffith Business School, Australia

This digest article examines systematic investment strategies in the Chinese commodity futures market. The paper’s results indicate that momentum and term structure strategies generate statistically significant profits across the futures curve, in the most liquid markets and in randomly selected sectors. In addition, the paper presents a head-to-head comparison of the important institutional settings with the U.S. market.

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By Rajkumar Janardanan, Summerhaven Investment Management; Xiao Qiao, Ph.D., Paraconic Technologies US Inc.; and K. Geert Rouwenhorst, Yale School of Management and Member of the JPMCC’s Research Council

As summarized by Xiao Qiao, Ph.D., Paraconic Technologies US Inc. and Member of the GCARD’s Editorial Advisory Board

This digest article examines the behavior of futures prices and trader positions around price limits in commodity futures markets. The authors ask whether limit events are the result of shocks to fundamental volatility or the result of temporary volatility induced by the trading of non-commercial market participants (speculators). The paper finds little evidence that limit events are the result of speculative activity, but instead are associated with shocks to fundamentals that lead to persistent price changes. When futures trading halts, price discovery migrates to options markets, but option prices provide a biased estimate of subsequent futures prices when trading resumes.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Principal, Premia Research LLC

This article describes risk premia strategies and notes how commodity risk premia strategies are an extension of ideas that originated in the equity markets. The paper then covers various techniques which attempt to minimize the inevitable losses that can arise from such strategies. The article concludes with several hypotheses on why commodity risk premia strategies have historically earned high average returns and does so by identifying the risk exposures that investors are taking on and for which they need to be compensated.

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By Abhishek Deshpande, Ph.D., Executive Director, Head of Global Oil Market Research & Strategy, J.P. Morgan

This article notes that investors in general remain wary of investing in oil especially if returns are likely to be challenged by the peak demand theory, or low-cost shale production in the medium term, or oil producers shifting their extraction of resources ahead of any pre-announced implementation of climate-based policies. Given the lack of investments in the sector and demand for oil being driven predominantly by non-OECD economies where population growth is on the rise, oil as an asset class could end up providing positive returns. Additionally, geopolitics will always be core to oil at least in the next decade.

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By Adila Mchich, Director, Research and Product Development, CME Group

The nature of price formation in the global Liquefied Natural Gas (LNG) market is increasingly the subject of both industry and academic attention. As the market shows greater appetite to gradually transition from oil indexation towards gas-to-gas pricing, many alternative price references have emerged as regional price signals, reflecting their respective markets. The article examines, from a market microstructure prospective, how a new U.S. business model is altering the structure of LNG trading transactions and subsequently positioning the U.S. to be the most likely anchor for price formation for the global LNG market.

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By Thomas Babbedge, Ph.D., Chief Scientist and Deputy Head of Systematic Strategies and J. Scott Kerson, Senior Managing Director and Head of Systematic Strategies, Gresham Investment Management

In Part 1 of 2, we explore the reduced performance of trend followers over the past decade but fail to find evidence that this is due to the commonly proffered reason of overcrowding of the strategy. Instead we find that the cause can be laid at the feet of the markets themselves – those markets commonly traded by trend followers have simply not trended as strongly in the past decade. In Part 2 we will turn our attention to the “trendiness” of a novel dataset of alternative commodity markets, selected based on a set of simple criteria. This will feature in a forthcoming edition of the GCARD.

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By Vito Turitto, Lead Quantitative Analyst, S&P Global Platts (U.K.)

Managing a commodity portfolio is not particularly easy because commodities markets respond to idiosyncratic features, which cannot be found in equities, nor in the fixed income markets. In fact, their response to changes in the macroeconomic, financial and geopolitical landscapes might considerably differ from one commodity to another. In order to better address these problems, this paper examines four important aspects of commodity portfolio management: (1) commodity market returns; (2) commodity volatilities; (3) commodity seasonal volatility; and (4) trend and mean reversion.

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By Elitza Voeva-Kolev, Market Analyst and Rahul Varma, Associate Director of the Market Intelligence Branch, Division of Market Oversight, U.S. Commodity Futures Trading Commission

This report describes research conducted on entering orders manually and automatically in commodity futures markets in the United States to determine how technological change is affecting futures trading.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this issue of the GCARD, we have the immense privilege of interviewing Blythe Masters, a former senior J.P. Morgan executive, who has distinguished herself as a thought leader and innovator across many disciplines, including in derivatives, commodities, and in digital asset technology.

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In his inaugural welcome letter, the Director of the JPMCC reviews the Center’s mission and purpose; summarizes one of his recent research projects; and discusses a recent thought-leadership panel sponsored by the JPMCC. The director also welcomed reader feedback on how the JPMCC can make the GCARD as relevant as possible to commodity industry practitioners, consistent with the JPMCC’s mission.

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This issue’s Research Director Report covers the JPMCC’s research outreach activities that took place during the latter half of 2018; introduces the JPMCC’s newly named research affiliates; discusses the continued positive impact of the August 2018 international commodities symposium; and notes the Center’s plans for the next international commodities symposium, which will take place in August 2019.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

This article makes the case for why volatility is not the same as risk and then describes an alternative approach to risk assessment, which is illustrated with an example from the corn market. An important next step in the author’s research process will be to make the new risk metrics, which are intuitively described in this paper, available publicly.

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By Lutz Kilian, Ph.D., Professor of Economics, University of Michigan, Ann Arbor and Member of the JPMCC’s Research Council and Xiaoqing Zhou, Ph.D., Senior Economist, Bank of Canada

In modeling industrial commodity markets, this paper argues that changes in the volume of shipping of industrial raw materials are a better proxy for global real activity than changes in the overall real output of the global economy because they more accurately capture the timing and magnitude of shifts in demand. In contrast, in modeling food commodities such as wheat, corn, or rice, the article notes that a case can be made that demand depends on global real income, making world real GDP a potentially more suitable measure of global real economic activity.

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By Doga Bilgin, Former Research Assistant, Bank of Canada and Reinhard Ellwanger, Ph.D., Senior Economist, Bank of Canada

This paper uses data on global fuel consumption to isolate the role of fuel demand shocks in the global oil market. Oil consumption, production and prices are driven by shocks to flow demand, flow supply and storage demand. Each of these shocks has a different impact on the oil market and the broader economy. The authors propose a simple structural framework that measures the importance of each of these drivers. This framework should be useful for policy analysis and forecast scenarios.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Principal, Premia Research LLC

This article reviews a class of trading strategies known as “weather fear premia” trades. The article argues that these trades may comprise a type of risk premium and notes the extra diligence needed in their risk management. The article explains that both superior trade construction and an analysis of fundamentals are also critical for the successful implementation of these types of trades. The paper concludes with a cautionary note on a catastrophic trading blow-up that occurred in November 2018, illustrating the risk of such strategies.

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By Tom Soutter, Trader, Fonterra Co-operative (New Zealand) and Isaac Manuel, Trader, Fonterra Co-operative (New Zealand)

This paper examines an approach to optimizing physical production decisions that considers risk. The paper discusses how to adapt the mean-variance-optimization approach to a constrained processor situation where the processor takes a raw input and has the option to refine it into many products.

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By Shikha Chaturvedi, Executive Director, Head of U.S. Natural Gas Strategy, J.P. Morgan

This article predicts that 2019 will be recognized for the meaningful step-change higher in U.S. liquefied natural gas (LNG) export capacity. One consequence of this change in the fundamental environment may be a structural shift in the forward curve as a new type of consumer participant is introduced to the U.S. natural gas balance – consumers of U.S. LNG exports.

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By Thomas K. Lee, Ph.D., Senior Economist, Energy Information Administration (EIA), U.S. Department of Energy (DOE) and Member of the GCARD’s Editorial Advisory Board and John Zyren, Ph.D., Senior Industry Economist & Econometrician, EIA, U.S. DOE

This paper compares the behavior of oil price volatility during two different time horizons: 1990 to 2003 and 2004 to 2018. The paper finds that the component of oil price volatility due to current information has diminished more quickly than previously while the systematic information component of oil price volatility has persisted longer than previously. The candidate hypotheses for why price volatility conditions have changed include fundamental changes in the markets such as the shale revolution, technology advancement, and geopolitics.

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By David Amato, Twan Dixon, Eugene Kunda, Jerry Lavin, Robert Penksa and Rahul Varma of the Market Intelligence Branch, Division of Market Oversight, U.S. Commodity Futures Trading Commission

This article provides an extensive, data-driven analysis by the CFTC’s Division of Market Oversight on the effects of the CME Group’s introduction of block trading for the full suite of agricultural futures products.

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By Tina Marie Reine, Commodity Markets Consultant

The authors of Economics Gone Astray make the compelling case that economists need to take their simplifying assumptions more seriously, to embrace statistical techniques that can track dynamic markets with time-varying parameters, and to always be aware of the importance of shifts in the underlying context. These concerns impact the analysis of financial and commodity markets alike.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

The GCARD’s interview with CME Group Chairman Emeritus Leo Melamed focuses on technological change in the financial markets. During the interview, the Chairman Emeritus discusses the wrenching move from floor trading to electronic trading, and he also provides his thoughts on the potential for disruptive change due to blockchain.

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This issue’s Research Director Report covers both (a) the highlights of the JPMCC’s 2nd annual international commodities symposium and (b) additional international outreach activities by the JPMCC’s Research Director. The JPMCC’s next high-profile symposium, featuring global commodity thought leaders, is scheduled for August 12 and August 13, 2019 in Denver. We hope to see you there!

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The sixth issue of the Global Commodities Applied Research Digest includes, amongst its articles, such familiar energy themes as (a) the importance of crude oil swing producers and spare capacity; (b) the dramatic changes in the liquefied natural gas markets; and (c) the analysis of renewable power purchase agreements. Along with these themes, we are including an educational special feature on cryptoassets and blockchain. We also congratulate Dr. Jian Yang, the JPMCC’s Research Director, for organizing a very successful conference of global commodity experts in August 2018, and we welcome Dr. Yosef Bonaparte as the newly named Director of the JPMCC, whom in turn is responsible for the day-to-day operations on the JPMCC, including its professional activities.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

Periodically, analysts and forecasters benefit from spending some time thinking about what might be the most disruptive developments that could materially change the way we analyze markets over a long-term horizon. In this research, we provide a perspective on the developments that may shape oil and natural gas markets as they evolve during the 2020s.

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By Brock Mosovsky, Ph.D., Director of Operations and Analytics, cQuant.io and Lance Titus, Managing Director, Uniper Global Commodities and Member of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board

This article is the second in a two-part series on the valuation and risk assessment of renewable Power Purchase Agreements (PPAs). The present paper outlines methodologies for shaping and hedging renewable PPAs, and we discuss the benefits of each of these strategies from both the buyer and seller perspectives.

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By Robert Greer, Scholar-in-Residence, J.P. Morgan Center for Commodities (JPMCC), University of Colorado Denver Business School and Member of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board

The three “super asset classes” are Capital Assets, Consumable/Transformable Assets, and Store of Value Assets. This framework can help asset allocators consider the diversification of risk factors that produces more effective portfolios. This framework also contributes to the understanding of how commodity investing fits into comprehensive portfolios.

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As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This digest article summarizes a co-written paper by the following four Cork University Business School, University College Cork, Ireland researchers: Jason Foran, Ph.D.; Mark Hutchinson, Ph.D.; David McCarthy, Ph.D.; and John O’Brien, Ph.D. Their article examines the ability of alternative-risk-premia products to capture the returns of the commodity trading advisor (CTA) sector. The paper’s empirical analysis indicates that CTAs have return series that cannot be easily replicated through factor investing.

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As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This digest article summarizes a research paper by the following three co-authors: Yousef Makhlouf, Ph.D., College of Business Law and Social Sciences, Nottingham Trent University, U.K.; Neil Kellard, Ph.D., Essex Business School and Essex Finance Centre, University of Essex, U.K.; and Dmitri Vinogradov, Ph.D., Adam Smith Business School, University of Glasgow, U.K. Their paper empirically investigates the impact of commodity price movements on child mortality in low and lower-middle income countries. They find that commodity terms-of-trade volatility increases child mortality in highly commodity-dependent importers. They also find that the presence of sound institutions (proxied by democracy) mitigates the harmful impact of commodity price volatility.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Principal, Premia Research LLC

The history of futures regulations reveals four features in determining whether a futures contract can succeed: (a) a contract must have a convincing economic rationale; (b) it is helpful if contracts are viewed as being in the national interest; (c) competition requires regulatory parity among exchanges; and (d) markets can survive even draconian interventions so long as they are short-term. This paper is excerpted from a seminar that was provided by the author for staff at the Shanghai Futures Exchange.

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By Adam Sieminski, CFA, President, King Abdullah Petroleum Studies and Research Center (KAPSARC), Saudi Arabia

This commentary is based on a KAPSARC research project that resulted in the April 2018 publication of the paper, “OPEC’s Impact on Oil Price Volatility: The Role of Spare Capacity,” in the Energy Journal. This study finds that OPEC’s spare capacity reduces oil price volatility and generates between $170 and $200 billion of annual economic benefits for the global economy.

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By Robert McNally, Founder and President, Rapidan Energy Group

This paper argues that we are in a new era marked by boom-and-bust oil price swings. Spare capacity has been very tight. This can pose a risk of oil price spikes eventually occurring, given the large number of actual and threatened disruptions present in the oil market.

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By Agnia Grigas, Ph.D., Nonresident Senior Fellow, Atlantic Council and Board Member, LITGAS

This article reviews how, over the last decade, the transformation of the natural gas markets has ushered in a shift of global geopolitics by the changing relationships between natural gas exporting, importing, and transit states. The article draws from the author’s book of the same title and explores how this energy revolution was driven by the shale boom, the rise of the liquefied natural gas trade, the rise in interconnective gas infrastructure, and growing global demand for natural gas as a cleaner fossil fuel.

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Dr. Jian Yang, Ph.D., CFA provides an update on the JPMCC’s research activities and future plans. As the J.P. Morgan Endowed Research Chair, Dr. Yang is the JPMCC’s Research Director. His three goals for the JPMCC are (1) for the center to become globally known for its innovative research in the commodity arena, (2) for the JPMCC to become a leading educator of cutting-edge knowledge in the commodities space, and (3) for the center to become a major participant in the exchange of knowledge amongst commodity thought leaders. Towards the latter goal, Dr. Yang is organizing the JPMCC’s second international commodities symposium, which will take place in August 2018 and which will include many top commodities scholars.

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The fifth issue of the Global Commodities Applied Research Digest (GCARD) draws from the JPMCC’s varied expertise across academia and industry. The Summer 2018 issue includes a special focus on the JPMCC’s inaugural international commodity symposium that took place in August 2017. The current issue also examines the prospects for commodities in light of geopolitical tensions and trade war concerns. In addition, the present edition examines various futures trading strategies, including momentum trading, positioning analysis, pairs trading, and volatility analysis. Finally, members of the GCARD’s Editorial Advisory Board have contributed articles on the fundamental developments in the crude oil market as well as on the considerations in evaluating renewable energy contracts. We welcome reader feedback on this issue.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

The biggest current threat to global growth is a trade war. There are other risks. The US Federal Reserve is unwinding quantitative easing and raising rates, but making the policy shifts very gradually with careful market guidance. Governments are focused on whether they need to cut taxes, not raise them, so there would be no growth risks from fiscal policy. Consumer confidence is relatively high around the world, from mature industrial countries to young emerging market countries. Equity market valuation may appear high to some, but stock market corrections do not cause recessions unless there is a financial panic – and systematic risks from financial institutions are much lower than when the last crisis occurred in 2008. After considering the other risks, we stand by our analysis that if the current synchronized global economic expansion is derailed, the most likely cause will be a trade war. Yet, we are optimistic. So far, the actions taken earn only the terminology of “Skirmishes,” but if they escalate to “Battles” and then a “Trade War,” we will need to reassess the risks. This article provides a review of the issues and challenges of trade protectionism.

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By Brock Mosovsky, Ph.D., Director of Operations and Analytics, cQuant.io and Lance Titus, Managing Director, Uniper Global Commodities and Member of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board

Renewable power purchase agreements (PPAs) have long been important enablers of renewable energy development. They are a means to providing the revenue certainty that project developers need to secure financing for capital-intensive wind and solar projects, and they also give renewable energy buyers access to the renewable energy they desire without upfront capital outlay or the need for development expertise. However, these agreements are complex long-term financial contracts and should be treated as such within any buyer’s broader business portfolio. In this first article of a two-part series on renewable PPA analytics, we illustrate how nuanced interactions between intermittent generation and electricity market prices can significantly impact PPA value. Without proper value tracking and active management, adverse market moves can erode PPA value over time and potentially require the buyer to make settlement payments each month to cover losses on the contract. In the second article of the series, to appear in the Winter 2018 edition of the GCARD, we will elaborate on the mechanics of risk mitigation strategies.

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By Kaifeng (Kevin) Chen, Ph.D., Chief Strategist, Hywin Capital Management, LLC and Member of the GCARD’s Editorial Advisory Board; Keith Black, Ph.D., CFA, CAIA, Managing Director, Curriculum and Exams, Chartered Alternative Investment Analyst Association and Member of the GCARD’s Editorial Advisory Board; and Lena Gerber, Senior Marketing Professional, University of Colorado Denver Business School

Over 80 international commodities researchers and practitioners attended the J.P. Morgan Center for Commodities’ (JPMCC’s) inaugural “New Directions in Commodities Research” international symposium in August 2017 to discuss critical thinking and new research related to commodities. The 2017 symposium took the place of the JPMCC’s annual Research Council meeting. The conference’s lead sponsor was the CME Group Foundation. The 2017 symposium included speakers and participants from a broad set of industries, regulatory agencies, and research institutions, including oil and natural gas companies, automobile manufacturers, renewable energy companies, U.S. national laboratories, universities, the Federal Reserve Bank of Dallas, the Commodity Futures Trading Commission, financial institutions, exchanges, and market research institutions. The broad range of topics covered by the conference included renewable energy finance, raw materials, shipping finance, macroeconomics, and China’s economic supply side reform. This article summarizes four of the presentations from the August 2017 conference.

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By Lutz Kilian, Ph.D., Professor of Economics, University of Michigan, Ann Arbor and Member of the JPMCC’s Research Council and Xiaoqing Zhou, Ph.D., Senior Economist, Bank of Canada

Between June 2014 and March 2016, the inflation-adjusted price of oil dropped by 66%. This price decline was one of the largest in history, yet average U.S. economic growth accelerated only slightly from 1.8% at annual rates before the oil price decline to 2.2% after the oil price decline. The absence of an economic boom in response to falling oil prices has puzzled some observers, given that higher oil prices in the past have been blamed for major economic recessions. That said, it is well documented that the consumption stimulus from lower oil prices is only modest, and the recent episode is no exception. What had not been fully appreciated is that the oil investment response does not depend so much on the magnitude of the oil price decline, but rather on how far the expected oil price declines relative to the break-even point. Hence, oil investment may change disproportionately, as oil price expectations change. This fact may hold the key to understanding the macroeconomic consequences of oil price shocks in countries with a sizable oil sector such as the United States. Professor Kilian presented on this article’s topic during his keynote speech at the JPMCC’s August 2017 international commodities symposium.

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By Martin Stuermer, Ph.D., Senior Research Economist, Federal Reserve Bank of Dallas

Demand shocks due to rapid industrialization have driven commodity price booms throughout history. As periods of industrialization lose steam and supply catches up, busts follow after about 10 years. A new dataset of price and production levels of 12 commodities provides evidence of this behavior from 1870 to 2013. Dr. Stuermer presented on this article’s topic at the JPMCC’s August 2017 international commodities symposium.

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By Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K.; and Joëlle Miffre, Ph.D., Audencia Business School, Nantes, France

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This digest article summarizes a flexible investment framework that nests standalone styles and integrations thereof and can be applied in a long-short, long- or short-only fashion to any asset class in zero net supply. Motivated by the unsettled debate on how to best model commodity risk premia, the usefulness of integration is demonstrated in the context of a “universe” of eleven long-short commodity styles. The findings hold after trading costs, variants of the sophisticated integrations, sub-period analysis and data snooping tests.

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By Robert Bianchi, Ph.D., Griffith University, Australia; Michael Drew, Ph.D., Griffith University, Australia; and John Hua Fan, Ph.D., Griffith University, Australia

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This article investigates the 52-week-high momentum trading strategy in commodity futures markets. The paper’s empirical analysis suggests that this behavioral-finance-motivated strategy generates significant profits after accounting for transaction costs, and outperforms the conventional momentum strategy. They further demonstrate that the 52-week-high momentum returns are significantly linked not only to the term structure and hedging pressure risk factors that reflect the inexorable contango and backwardation cycle but also to the TED spread that proxies for global liquidity risk.

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By Ioannis Psaradellis, Ph.D., University of St Andrews, U.K.; Jason Laws, Ph.D., University of Liverpool, U.K.; Athanasios Pantelous, Ph.D., Monash University, Australia; and Georgios Sermpinis, Ph.D., University of Glasgow, U.K.

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This article examines the performance of technical rules applied to the pairs-trading strategy using daily data from 1990 to 2016. The main finding is that while the performance of pairs-trading based on technical analysis exhibits a downward trend over the sample period, the opportunity for significant pairs-trading excess profitability remains.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Principal, Premia Research LLC

The Winter 2017 issue of the Global Commodities Applied Research Digest (GCARD) provided a case study on the MF Global bankruptcy. In this issue of the GCARD, we cover another debacle: the Amaranth (commodity) hedge fund debacle. While the lessons from the MF Global bankruptcy can best be understood in terms of due diligence principles, the Amaranth blowup can best be understood in terms of market-risk principles.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Principal, Premia Research LLC

This digest article covers examples of successful contracts that responded to new large-scale commercial risks over the past 170 years. The article explains the new commercial circumstances that ushered in the intense need for hedging instruments, spanning the grain, financial, crude oil, and natural gas markets. This digest article is excerpted from a seminar that was prepared by the author for staff at the Shanghai Futures Exchange.

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By Daniel Murray, Deputy CIO and Global Head of Research, EFG Asset Management (U.K.) and Member of the GCARD’s Editorial Advisory Board

We live in a world of heightened geopolitical risk where developed countries are reliant on less politically stable countries for the supply of many commodities. Yet there is little academic literature that investigates these relationships. This paper presents such an analysis using a new index of geopolitical risk. An initial simple event analysis is performed comparing spikes in geopolitical risk with the performance of various financial markets. The results are ambiguous: the relationships vary enormously over time and across financial indices. A vector autoregressive analysis is performed to examine the relationships more closely. Granger causality from commodity prices to geopolitical risk is shown to have existed before the global financial crisis but not subsequently. Impulse response analysis generally shows a weak response both from commodities to geopolitical risk as well as in the other direction. This is in contrast with commonly held views about the impact of geopolitical risk on commodity prices.

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By Jan-Hein Jesse, Founder, JOSCO Energy Finance and Strategy Consultancy (Amsterdam) and Member of the GCARD’s Editorial Advisory Board

This article is the second in a two-part series. This series provides insights into the complex dynamics of oil price formation from 2014 onwards. Part 1 focused on the events influencing the oil markets from 2014 through 2015 while Part 2 covers (a) oil-market-moving events from 2016 through the present and near future and (b) JOSCO Energy Finance and Strategy’s field-by-field oil production analysis through 2025.

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By Mark Keenan, Managing Director, Global Commodities Strategist and Head of Research for Asia Pacific, Société Générale Corporate & Investment Bank (Singapore) and Member of the GCARD’s Editorial Advisory Board

In recent years, positioning has become a key driver of commodity prices and a principal factor in shaping sentiment and behavior. Published in January 2018, the book, “Positioning Analysis in Commodity Markets,” defines and establishes “Positioning Analysis” as an area of research that provides a powerful framework to better understand price dynamics, risk, sentiment and behavior in commodities. The article highlights key areas of the book, explaining how certain types of positioning patterns, in the context of changes in a variety of variables, can be used to develop different models, indicators, analyses and trading signals.

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By Vito Turitto, Manager, Quantitative Analysis, S&P Global Platts (U.K.)

Market risk and hedging strategies have, particularly over the last few years, helped many market participants mitigate crude oil market fluctuations. The implementation of efficient energy hedging strategies has often made the difference between business success and bankruptcy. An indispensable element of hedging is the estimation of volatility. This article explains how a study of volatility fluctuations can be used to build efficient hedging strategies and to understand market sentiment. The key features of this analysis focus on volatility asymmetry and volatility’s mean-reversion propensity. The article finds a negative link between implied volatility, extracted from average price options, and swap prices in both the Brent and WTI markets, implying an asymmetric volatility response to changes in the underlying price. The mean-reversion propensity of volatility is also found to be rather strong in both crude grades under examination.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In the Summer 2018 issue of the GCARD, we are delighted to interview Dr. James Hamilton, Professor of Economics, University of California, San Diego and Co-Chair of the JPMCC’s Research Council. Professor Hamilton also serves as the JPMCC’s Distinguished Visiting Fellow. In this issue’s interview, Professor Hamilton explains what originally spurred his interest in the impact of oil price increases on the economy, followed by what he currently sees as important research issues. He also touches upon what encouraged him to become involved with the JPMCC and its Research Council, noting some of his goals for the Research Council and its international commodity symposia. The interview concludes with Professor Hamilton discussing both the potential impact the JPMCC could have on the commodity industry and his recommendations for future topics in the GCARD.

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In this letter, Dr. Rohan Christie-David, Ph.D., the Dean of the University of Colorado Denver Business School, emphasizes the importance of the GCARD to the J.P. Morgan Center for Commodities’ overall strategy and to the extended global commodities community. The essence of the JPMCC mission is to foster the practical application of the latest innovations developed either in academia or in industry. This is of course the raison d’etre for the GCARD, and the JPMCC team will be working hard to continue its development and grow its audience as a primary resource to bring interest and participation to the Center.

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The GCARD team is happy to present the fourth issue of the Global Commodities Applied Research Digest. Members of both the JPMCC’s Research Council and the GCARD’s Editorial Advisory Board have lent their expertise to the current issue. This issue features articles from across the commodity complex, including on the energy, metals, and agricultural sectors. This edition also includes articles relevant to commodity supply chains, commodity futures regulation, and to fiduciary due diligence. We welcome feedback from our readers on what topics would be of most value to commodity-market participants.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

Oil markets are especially hard to analyze. Since late 1973, when the Organization of the Petroleum Exporting Countries (OPEC) first flexed its muscles, the oil price has been on a roller coaster ride. Not only does one have to analyze the politics and economics of OPEC, but there have been major resource discoveries, such as the North Sea, as well as supply-side technological revolutions with hydraulic fracturing of shale oil. In addition, we are now looking forward to demand-side technological disruption from electric vehicles. The inability to assume a stable political or technological environment is a major challenge since the one thing that seems certain is that the supply and demand parameters are time-varying, and the parameter shifts seem to come in jumps and not in a steady pattern. Failure to use statistical techniques allowing for regime shifts can lead to estimates that unintentionally embed the view that the past is a useful predictor of oil market prices – which it is decidedly not. Our analysis here includes the major longer-term technological changes to consider on the supply and demand side, as well as examining short-term influences on oil prices in 2018.

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By Thomas Brady, Ph.D., Chief Economist, Newmont Mining Corporation and Member of the JPMCC’s Research Council

Since 1900, the global gold mine supply has been driven by periods of substantial exploration success, technological advances in both mining methods and processing and more recently by trends in gold prices themselves. This article provides a review of supply from Newmont’s Carlin operations in northern Nevada where the Company has been in operation since the mid-1960s and has benefited greatly from all of the aforementioned drivers. The lag between gold price trends and mine supply is also reviewed as well as expectations for global supply trends going forward.

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Summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

At the JPMCC’s September 2016 Research Council meeting, Mr. John Schmitter, President, KEP LLC, discussed rail capacity challenges. This digest article summarizes Mr. Schmitter’s presentation, in which he explained 1) how railroads fit in the commodity supply chain, 2) North American railroad industry characteristics, 3) rail capital investment and capacity, and 4) rail availability risk.

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By Charoula Daskalaki, Ph.D., Department of Economics, University of Crete, Greece; and George Skiadopoulos, Ph.D., Department of Banking and Financial Management, University of Piraeus, Greece

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This digest article assesses the effect of margin changes on prices, the risk-sharing between speculators and hedgers, and the price stability of 20 commodity futures markets. The paper provides evidence that margin increases decrease the rate at which prices change, yet they impair the risk-sharing function and decrease market liquidity in certain markets.

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By Steven Jordan, Ph.D., Alfaisal University, Saudi Arabia; Andrew Vivian, Ph.D., Loughborough University, United Kingdom; and Mark Wohar, Ph.D., University of Nebraska-Omaha.

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This article documents empirically that precious metals contain economically valuable predictive information content for stock returns. These gains remain after considering reasonable transaction costs, and are large enough to make active portfolio management potentially attractive, even for individual investors.

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By Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Bart Frijns, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K.; and Joëlle Miffre, Ph.D., Audencia Business School, Nantes, France

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This article investigates the link between the skewness of the distribution of commodity futures returns and subsequent price changes. A trading strategy that goes long futures contracts with the most negative skew and shorts futures contracts with the most positive skew has historically generated significant alpha.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

Gaining expertise in the commodity markets usually occurs through trial-and-error experiences, some of which can be quite painful. This article describes two frequent mistakes: (1) the use of inappropriate sizing and (2) a misunderstanding of the psychological discipline required for futures trading.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

In the fall of 2011, futures market participants were caught off-guard when MF Global filed for bankruptcy. This article takes the position that a number of red flags existed as far back as 2007, regarding the firm’s financial weakness, which could have served as a warning to those investors relying on MF Global as a fiduciary. The article concludes that while MF Global’s business model appears not to have been viable after 2007, this observation does not excuse unlawful practices. In particular, the firm effectively (and arguably unlawfully) used customer funds in large-scale proprietary trades that the firm ultimately could not fund, leading to its chaotic bankruptcy.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This article discusses how fund managers can choose amongst wheat futures contracts at the CME Group if they are interested in expressing bullish economic and inflationary views through positions in the agricultural futures complex.

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By Jodie Gunzberg, CFA, Managing Director, Head of U.S. Equities, S&P Dow Jones Indices and Member of the GCARD’s Editorial Advisory Board

This article examines what the impact of the fluctuating fortunes of the Chinese economy appears to have been on the price performance of commodities overall, as well as on commodity sectors and individual commodities. The article is based on the author’s presentation at the JPMCC’s international commodities symposium in August 2017.

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By Isabel Figuerola-Ferretti, Ph.D., Professor of Finance, ICADE, Universidad Pontificia de Comillas (Madrid) and Member of the GCARD’s Editorial Advisory Board

Gaining expertise in derivatives markets typically occurs by working in firms that have strict rules on keeping their trade secrets proprietary. This article helps fill the knowledge gap by covering both fundamentally-oriented trading and a type of convergence trading.

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By Jan-Hein Jesse, Founder, JOSCO Energy Finance and Strategy Consultancy (Amsterdam) and Member of the GCARD’s Editorial Advisory Board

This article is the first in a two-part series. The series will provide insights into the complex dynamics of oil price formation from 2014 onwards. Part 1 focuses on the events influencing the oil markets from 2014 through 2015 while Part 2, which will appear in the next issue of the GCARD, will cover the oil-market-moving events from 2016 through the present. The author previewed some of the work featured in this digest article during his Knowledge Exchange lecture at the JPMCC in April 2016.

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By Hilary Till, Contributing Editor, and Joseph Eagleeye, Editorial Advisory Board Member, GCARD

This paper discusses inferring crude-oil-market fundamentals through price-relationship data, largely through the perspective of a commodity futures trader. In doing so, the paper briefly covers (1) the promise of big data; (2) the reality of data “black holes”; (3) the wealth of futures price data; (4) what futures prices potentially reveal about petroleum-complex fundamentals; and (5) caveats on the use of price data.

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By Faouzi Aloulou, Senior Economist, U.S. Energy Information Administration

This article provides an update on the fortunes of the U.S. Haynesville shale region, which is amongst the top four natural gas production areas in the U.S. Technological improvements have led to a rebound in shale gas production to the highest levels for the region since the end of 2013.

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By Colin Waugh, Partner, SCP Africa Investments

Following a brief overview of the current global supply and demand situation for liquefied natural gas (LNG), this article examines to what degree non-market forces have contributed to a narrowing of inter-regional price differentials. Against an overlay of rapid technological change that has facilitated new sources of supply, the situation in North America is contrasted with the very different forces impacting LNG prices in Europe. Finally, the article surveys the largest and most rapidly changing global market, Asia, briefly evaluating each of the most important non-supply-demand factors to have reshaped LNG trade in recent years and their impact on price movement.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In the Winter 2017 issue of the GCARD, we are honored to interview Mr. Robert Greer, Scholar-in-Residence at the JPMCC. Mr. Greer explains how he became involved in the commodity markets and what led him to writing the first published article on an investable commodity index. He also touches on some of the major changes in the commodity industry, concluding with a description of the value that the JPMCC can potentially bring to the commodity industry.

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In this letter, Dr. Rohan Christie-David, the new dean of the University of Colorado Denver Business School, welcomes GCARD readers to the third issue of the commodities digest. Dean Christie-David notes that his goal is to build the J.P. Morgan Center for Commodities (JPMCC) into a global leader in both commodities education and thought leadership. Future issues of the GCARD will discuss the JPMCC’s progress toward that goal.

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The GCARD  team is proud to present the Spring 2017 issue of the Global Commodities Applied Research Digest.

In this issue, members of both the J. P. Morgan Center for Commodities’ (JPMCC’s) Research Council and the GCARD’s Editorial Advisory Board have generously contributed the lion’s share of articles, demonstrating the deep pool of talent within the JPMCC. This issue also discusses the upcoming International Commodities Symposium, which will take place at the JPMCC in August of this year and will include a panel from the GCARD’s Editorial Advisory Board. Like the GCARD, the symposium is supported by a grant from the CME Group Foundation.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

Gold may see some extra volatility in 2017 as several driving forces are converging. Gold bears no interest, so in a rising rates environment its value may be challenged. Improved risk management and technological enhancements may also play a role in the continued expansion of production, even if prices fall. Central banks have been buying gold for the last few years, but will they continue? China appears to be decelerating further, and it has been a big buyer of gold. Taking each of these factors into consideration, this could be quite a volatile year for the shiny metal.

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By Ehud I. Ronn, Ph.D., Professor of Finance, McCombs School of Business, University of Texas at Austin and Member of the JPMCC’s Research Council

Financial markets in general, and energy finance markets in particular, are highly informative. The challenge is always in interpreting what exactly the message is from the markets. We address this issue in the crude oil markets with an examination of the level of spot prices and the implied volatility of crude oil futures prices.  Professor Ronn’s Encana Distinguished Lecture at the JPMCC on March 9, 2017 was closely related to this topic.

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In this issue of the GCARD, the Contributing Editor covers the commodity derivatives markets from a broadly conceptual perspective. Specifically, this section’s collection of articles reviews (a) the potentially persistent sources of return in the commodity futures markets; (b) the differing risk-management priorities for commercial versus speculative commodity enterprises; and (c) the economic role of commodity market participants.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This digest article describes potentially persistent sources of return in the commodity futures markets due to (1) hedge pressure, (2) scarcity, and (3) weather-fear premia. But the article also notes that active commodity futures strategies can be limited in scalability and can potentially lose their potency due to structural breaks or popularization.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This digest article discusses how risk management in commodity futures trading takes two different forms, depending on whether trading is done for a commercial or a purely speculative enterprise. The paper discusses that for commercial enterprises, the most important aspects of risk management are in (a) adhering to regulatory rules and laws, and in (b) establishing strict operational policies and procedures over every facet of risk-taking activity. In contrast, for a purely speculative participant, the emphasis is almost entirely on market risk-management.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This article notes how the terms, “hedging” and “speculation,” are not precise. What futures markets accomplish is the specialization of risk-taking rather than the elimination of risk. In addition, this paper discusses how there is some empirical evidence to support the theory that speculative involvement actually reduces price volatility. This article also explains that even when commodity futures markets are viewed as “hedging” markets, there is still a vital role for speculators because there will not always be an even balance of short hedgers and long hedgers at any one time: speculators are needed to balance the market.

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By Charoula Daskalaki, Department of Banking and Financial Management, University of Piraeus, Greece; George Skiadopoulos, Department of Banking and Financial Management, University of Piraeus, Greece, and School of Economics and Finance, Queen Mary, University of London; and Nikolas Topaloglou, Department of International and European Economic Studies, Athens University of Economics and Business, Greece

As summarized by Ana-Maria Fuertes, Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This paper revisits the question of whether it is worthwhile for investors to include commodities in their equity and bond portfolios. In studying this question, the authors use a statistical methodology that circumvents the need to make assumptions on investors’ preferences and the distribution of asset returns. The authors find in both in-sample and out-of-sample tests that commodities provide diversification benefits, especially, for second- and third-generation commodity indices. Of note, the authors of the comprehensive article were recipients of a Commodities Research Fellowship Award at the J.P. Morgan Center for Commodities. This fellowship, in turn, was generously funded by the CME Group Foundation.

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By Adrian Fernandez-Perez, Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Cass Business School, City, University of London, U.K.; and Joëlle Miffre, EDHEC Business School, Nice, France

As summarized by Ana-Maria Fuertes, Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This article investigates the nexus between idiosyncratic volatility and returns in commodity futures markets. The authors find that the seemingly abnormal performance of active strategies that systematically exploit idiosyncratic volatility turns out to be a fallacy associated with the use of an inappropriate benchmark. Instead, suitable benchmarks reveal that idiosyncratic volatility cannot be a specifically rewarded risk factor since it can be diversified away.

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By Thorvin Anderson, CFA, Content Director, “Foundations for Commodities” Professional Education Program, JPMCC, University of Colorado Denver Business School and Member of the JPMCC’s Research Council

As discussed at the JPMCC’s September 2016 Research Council meeting, recent developments in battery technology have given rise to energy storage devices targeting not just wholesale or grid support operations, but residential buyers as well. While several manufacturers compete in this space, it is Tesla, with its Powerwall, that has commanded the majority of media attention. Billed as a complement to residential rooftop solar installations, the Powerwall offers homeowners the allure of some measure of energy independence, reliability, and cost savings, all with not-too-subtle intimations that use of this storage technology is associated with superior environmental stewardship. This paper examines the Powerwall product, and by implication its competitors, in the context of today’s electricity markets to consider the validity of these claims and the prospect of retail electricity storage significantly impacting the electric market.

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By Nikos Nomikos, Ph.D., Professor of Shipping Risk Management, Faculty of Finance, Cass Business School, City, University of London, U.K. and Member of the JPMCC’s Research Council

As discussed at the JPMCC’s September 2016 Research Council meeting, the shipping industry plays an important role in the world economy since about 90% of the world trade is carried by sea. One of its sectors is the dry bulk market that involves the transportation of homogeneous bulk commodities, typically raw materials such as iron ore, grains, coking and thermal coal, bauxite and alumina, on non-scheduled routes, mainly on a ‘one ship-one cargo’ basis. The dry bulk sector is important in its own right, as it represents by far the largest shipping segment in terms of both cargo carrying capacity and quantity transported. This digest article describes the statistical properties of both dry-bulk shipping demand and supply and does so as well for shipping earnings and vessel prices.

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By Sven Streitmayer, Senior Commodity Risk Manager, Robert Bosch GmbH (Germany) and Member of the JPMCC’s Research Council

As similarly discussed at the JPMCC’s September 2016 Research Council meeting, this article delivers insights into the different risk-management approaches employed by the German-based Bosch Group. The Bosch Group is a leading global supplier of technology and services whose operations are divided into four business sectors: mobility solutions, industrial technology, consumer goods, and energy and building technology. The article also provides specific examples of challenges for commodity risk managers such as the recent changes in financial market regulation, the handling of non-exchange traded commodities, and the potential involvement in newly launched derivative markets and instruments.

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By Hilary Till, Contributing Editor, and Joseph Eagleeye, Editorial Advisory Board Member, GCARD

One typically finds that institutionally-scaled futures programs employ trend-following algorithms. Here, the key is employing such algorithms across numerous and diverse markets such that the overall portfolio volatility is dampened. On the other end of the spectrum are calendar-spread strategies. These strategies typically have limited scalability but individually can potentially have quite consistent returns.

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By Ebele Kemery, Portfolio Manager, Head of Energy Investing at J.P. Morgan Asset Management and Editorial Advisory Board Member, GCARD

American onshore oil companies have evolved over the last three years: they are more disciplined about leverage, capital deployment and acreage. Weak companies have collapsed or been acquired, leaving the sector much stronger than seen in decades. This article discusses the current shape of American shale producers as they emerge from one of the most dramatic oil price collapses in modern history.

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By Fergal O’Connor, Ph.D., Senior Lecturer in Finance, University of York, U.K. and Editorial Advisory Board Member, GCARD

This digest article examines whether gold can hedge an investor’s inflation risk over the long term. Though many studies do find that a long-run equilibrium relationship exists between gold and inflation in various countries, these results may not be relevant for the outcomes that real investors would have experienced. This article examines the results of saving an ounce of gold a year for a U.S. dollar-based investor over 25 to 40 years, as someone saving for a pension would, over a 200-year period. Perhaps somewhat surprisingly, in the majority of cases, saving in gold would not have compensated these investors for inflation when they came to draw down their funds at retirement. The paper concludes that there may be good reasons for an investor to hold gold, including portfolio diversification benefits and acting as a safe haven during major market crashes, but reliable inflation hedging properties does not appear to be one of them.

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By Peter O’Neill, CFA, Chief Risk Officer and Head of Finance, Uniper Global Commodities North America, a wholly-owned subsidiary of E.ON and Editorial Advisory Board Member, GCARD

In the power markets, prices can move rapidly at quite inopportune times. This article highlights one such event in the Texas power market and describes what led up to and contributed to this extreme market price move, followed by what happened as the market went into settlement. The article concludes with lessons learned on how to manage the price risk around such an event.

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By Anne-Sophie Corbeau, Research Fellow, KAPSARC (Saudi Arabia)

The Liquefied Natural Gas (LNG) industry is going through the largest increase in LNG capacity ever, equivalent to twice the LNG export capacity of Qatar. These new supplies are arriving in a market environment significantly different in terms of supply, demand and prices from what the industry anticipated when investment decisions were taken. Slower than expected LNG demand growth is forcing sellers to look for new, more riskier markets. But a potential market squeeze beyond 2020 is currently the greatest worry of investors and buyers alike, as very few projects have been sanctioned since mid-2015. Buyers have become more demanding about what they are ready to accept in terms of contractual conditions. Their demands focus on three different aspects: pricing mechanisms, flexibility and final destination clauses. Sellers have become increasingly worried on how far negotiations could be pushed and that the sanctity of long-term contacts could become under threat.

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By Andy Hecht, Subject Matter Expert, “Foundations for Commodities” Professional Education Program, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This brief article outlines the changes in the political and economic landscape that one might expect with the new U.S. administration. The article also argues that the changing regulatory environment twinned with the potential for energy independence could lead to vast changes in the commodity markets. The article concludes with exploring the growing potential for some commodity merchant businesses to return to the shores of the U.S. over the months and years ahead.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In the Spring 2017 issue of the GCARD, we are honored to interview Dr. Vince Kaminski, Ph.D., Professor in the Practice of Energy Management, Rice University and an inaugural member of the JPMCC’s Research Council. In this issue’s interview, Professor Kaminski discusses his motivation for joining the Research Council and the value that the JPMCC can bring to commodity market participants. He also elaborates on his metaphor of comparing the various parts of the commodity complex to a Rubik’s Cube, which he had proposed at the JPMCC’s April 2015 Research Council meeting. In addition, Dr. Kaminski generously summarizes his September 2016 Research Council presentation on the involvement of financial institutions in the commodity markets. Dr. Kaminski’s interview also includes how he came to specialize in the commodity markets, and he offers advice to students and young professionals whom are interested in potential careers in the commodity markets. His interview also covers his newly published and updated reference textbook, Managing Energy Price Risk, which is now in its 4th Edition at Risk Books, and he concludes with suggestions on what topics should be covered in future issues of the GCARD.

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By Ajeyo Banerjee, Ph.D., CMA, Executive & Faculty Director, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

The “New Directions in Commodities Research” conference is an international commodities symposium, which is being organized at the J.P. Morgan Center for Commodities, University of Colorado Denver on August 10-11, 2017. The symposium will bring together global thought-leaders and prominent stakeholders in commodities to discuss new research related to commodities.

The conference organizers are Ajeyo Banerjee, Ph.D., Associate Professor of Finance and Risk Management, Executive & Faculty Director, JPMCC and Graham Davis, Ph.D., Professor of Economics, Colorado School of Mines and Member of the JPMCC’s Research Council. The technical committee for the symposium is drawn from the membership of the JPMCC’s Research Council.

The conference is being sponsored by the CME Group Foundation and by the Payne Institute for Earth Resources.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

My colleagues and I are happy to present the Fall 2016 issue of the Global Commodities Applied Research Digest (GCARD) to you. For the benefit of GCARD’s practitioner readership, we have pulled together insights from the following J.P. Morgan Center for Commodities’ (JPMCC’s) sources: (a) its Research Council members; (b) the Center’s past Research Council meetings; (c) the JPMCC’s Global Commodity Issues [Editor’s Choice] e-Journal; and from (d) the GCARD’s Editorial Advisory Board. The expertise and diversity of these sources result in the GCARD being able to further the JPMCC’s goal in becoming the focal point for highly relevant commodities thought-leadership.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group

This article discusses the shift of weather patterns from El Niño 2015 (warmer waters along the east equatorial Pacific Ocean) to the potential La Niña 2017 (colder waters along the east equatorial Pacific Ocean) and the effects this shift could plausibly have on energy and agricultural markets.

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By Colin Fenton, Managing Partner and Head of Research, Blacklight Research LLC

As of July 29th, 2016, US GDP estimates confirmed that the US economy was in a broad and sustaining slump. Blacklight Research had previously identified this decline and termed it, “The Great Suppression.” This article explains the five main suppressants that drive the Great Suppression: climate policy, FOMC monetary policy, US crude export policy, OPEC production policy and international policy toward the Syrian crisis.

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The Contributing Editor’s collection of four articles covers issues that are relevant to the agricultural, metals, and energy markets, reflecting the J.P. Morgan Center for Commodities’ commitment to include all commodity sectors in both its applied research and educational efforts.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This digest article covers how to further distill returns in the commodity markets beyond that which is available through passive exposures to various commodity sectors. A manager can potentially do so through the use of well-chosen entry and exit rules, trade construction, and downside risk management. In addition, an actively managed commodity portfolio will tend to have dynamic exposures to the various commodity sectors, given the seasonal nature of a number of commodity trading opportunities.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This digest article discusses the practical issues involved in applying a disciplined risk management methodology to commodity futures trading. Accordingly, the paper shows how to apply methodologies derived from both conventional asset management and hedge fund management to futures trading. The article also discusses some of the risk management issues that are unique to leveraged futures trading.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

The GCARD’s Spring 2016 “Contributing Editor’s Collection” of articles included an article on “Brief Case Studies on Futures Contract Successes and Failures.” That article noted that even though the U.S. futures markets have evolved in a trial-and-error fashion, one can nonetheless identify the key elements that determined whether particular futures contracts succeeded or failed. In this issue, we extend this past analysis by examining why a particular metals futures contract has not succeeded thus far: the uranium futures contract. Such an analysis, as in this article, may be valuable for new financial centers as they build successful futures markets.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

Should an investor enter into long-term positions in oil futures contracts? In answering this question, this paper covers the following three considerations: (1) whether crude oil inventories are scarce or not; (2) how to avoid the risk of oil prices crashing; and (3) the use of financial assets for diversification purposes. The paper concludes that positions in crude oil futures contracts should (a) not only be actively timed, but (b) must also be twinned with financial assets in order to hedge against both the possibility of deflationary conditions and/or periodic oil-market-share price wars.

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By Shaun K. Roache, Ph.D., Temasek International and Marina Rousset, International Monetary Fund

As summarized by Dr. Keith Black, Ph.D., CFA, CAIA, Managing Director, Curriculum & Exams, CAIA Association

Investors and suppliers have long sought to understand and predict commodity prices using supply and demand analyses. Historically, commodity demand was measured by the quantity of commodities consumed through food or industrial uses. After the Chinese Property Law was enacted in October 2007, an increasing amount of industrial metals have been placed into storage and used as collateral for loans. Including these warehouse stocks in demand estimates, especially in copper, seem to overestimate the demand for industrial metals in the Chinese market. Investors and suppliers of industrial metals should adjust their supply and demand models to account for the risk of the unwinding of these inventories.

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Summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

At the JPMCC’s December 2015 Research Council meeting, Professor Forest Reinhardt of Harvard Business School (HBS) led a discussion on an HBS case study on Olam International, which Professor Reinhardt had co-authored. This digest article summarizes Professor Reinhardt’s case study lecture.

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Summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

At the JPMCC’s December 2015 Research Council meeting, Professor James Hamilton of the University of California, San Diego, discussed why it turned out that oil priced at $100 did not hold, starting in 2014. Dr. Bluford Putnam of the CME Group and Professor Yosef Bonaparte of the University of Colorado Denver discussed Professor Hamilton’s research from both practitioner and academic perspectives, respectively. This digest article summarizes Professor Hamilton’s panel session.

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By Hilary Till, Contributing Editor, and Jan-Hein Jesse, Editorial Advisory Board Member, GCARD

The article begins with the classic definition of a swing producer and notes that North American tight oil (shale) producers would not normally fit this strict definition. The paper then argues that advances in well-production estimation techniques naturally led to an explosion of creative financing solutions for investing in shale. As a result, the appetite of credit markets for taking on shale-production risk became a key driver for the outlook for North American oil production. Next the article proposes that we might be able to refer to shale producers as swing producers as long as we loosen the definition of swing producer to be one in which there are fairly uniform production decisions that take place over up to a 12-month timeframe. The paper then notes that at some point, geological constraints (much more than the credit cycle) could come back into play and the baton would thereby pass back to the Middle East Gulf oil producers as the undisputed swing producers. Lastly, the paper returns to a shorter-term perspective, describing how the capital markets will likely be much more cautious in investing in shale oil production, even with a continuation in the recovery of the price of oil.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In the Fall issue of the GCARD, we interview Dr. Margaret E. Slade, Ph.D., Co-Chair of the J.P. Morgan Center for Commodities’ (JPMCC’s) Research Council. In this interview, Dr. Slade discusses her motivation for becoming the Co-Chair of the Research Council and notes that there are no other academic centers like it. She also provides highlights of the 2015 Research Council meetings and details her goals for the Council. In addition, Dr. Slade discusses how she became involved in the commodity markets. She then notes key findings of her recently published work. Lastly, Dr. Slade also provides feedback on the GCARD, regarding the types of topics that should be covered, given its practitioner focus.

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Summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

The J.P. Morgan Center for Commodities also produces the Global Commodity Issues (GCI) [Editor’s Choice] e-Journal, which is edited by Professor Marcelle Arak of the University of Colorado Denver Business School. The GCI [Editor’s Choice] distributes working papers and abstracts of accepted papers in commodities, including agricultural, minerals/mining, and energy-related commodities worldwide.

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The commodities sector (oil, minerals/metals and energy) are a critical sector of the economy. However, they are generally underserved in terms of knowledge and skill enhancement opportunities. The J.P. Morgan Center for Commodities is uniquely positioned to fill this gap through its offer of 1-3 days courses on commodities with CE credits.

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Guided by veteran industry practitioners, and utilizing one of the most user-friendly statistics packages on the market, students gain a core practical competency in econometrics and price modeling for the commodity markets. Students become familiar with not only the dominant methods for modeling forward curve dynamics, but also advanced methods employed by the most sophisticated market participants.

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In the Spring 2017 Professional Education offering, attendees gain a high level of understanding of the commodities industry from physical aspects (supply chain, fundamentals, asset monetization) to the financial (market structure, spreads, futures and derivatives). Risk management and regulation compliance are covered at a high level. The goal of this course is to educate professionals on the foundational concepts of commodities in the physical and financial arenas including key terms and concepts, underlying principles, market structure, futures and derivatives, risk management, and regulation. This course provides an affordable and accelerated curriculum for new hires in commodity-related businesses.

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Dr. Ajeyo Banerjee welcomes readers to the inaugural issue of the Global Commodities Applied Research Digest (GCARD). This bi-annual publication is generously sponsored by the CME Group Foundation, and the purpose of this new digest is to highlight the key findings of applied research on topical commodity issues.

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Ms. Hilary Till writes that she has always enjoyed the commodity markets as an active participant. These markets are like a big tent that comfortably encompasses a wide variety of talented professionals and includes, for example, global-macro strategists, street-smart practitioners, careful fiduciaries as well as brilliant quants. In helping to create the first issue of the GCARD, she has been delighted to stretch the boundaries of this big tent even further to include influential policy advisors and distinguished academics. The Spring 2016 GCARD includes a diverse set of topics from across commodity industry segments in order to present as comprehensive a picture of commodity research as possible.

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In the “Research Council Corner” section, we are pleased to include articles from the following three distinguished members of the Research Council: Thomas Brady, Ph.D., of the Newmont Mining Corporation; Bluford Putnam, Ph.D., of the CME Group; and Marcelle Arak, Ph.D., of the University of Colorado Denver Business School. Dr. Arak’s article is co-authored with Sheila Tschinkel, Visiting Faculty in Economics at Emory University.

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By Thomas Brady, Ph.D., Chief Economist, Newmont Mining Corporation

Prevalent in the literature concerning economic contributions of mining is the view that royalty rates and taxes, which governments levy on mineral extraction, are the primary sources of benefits a host-country receives from a typical mining operation. Instead, this article recommends a careful analysis of the more holistic benefits of mining by host countries.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group

In the oil markets, there are several long-term supply and demand forces in play as well as some shorter-term response factors that make for a very difficult mix to analyze going forward. In summary, the article’s forward-looking analysis suggests that the era of relatively low prices could last for many years. That said, there are always small probability events, such as further conflict in the Middle East, which could lead to upside price risks, in which case economic conditions would definitely not be the predominant price driver, concludes the article.

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By Marcelle Arak, Ph.D., CoBank Professor of Commodities, University of Colorado Denver Business School; and Editor, “Global Commodity Issues [Editor’s Choice],” and Sheila Tschinkel, Visiting Faculty in Economics at Emory University, Atlanta

This article focuses on the low price elasticity of demand for crude oil in the short run and notes the implications of this observation. Further, the authors discuss what the threshold level of coordination is for a core group of oil swing producers, which would maximize revenue assuming that “other producers do not change their output in response.” The authors observe that the required level of coordination has not occurred and perhaps is not possible, given “varying foreign policy interests and economic structures.” Therefore, the price of oil could to continue its slide.

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This collection of four digest articles provides answers to the following questions:

• When has OPEC spare capacity mattered for oil prices?
• What are the sources of return for CTAs and commodity indices?
• What are the risk-management lessons from high-profile commodity derivatives debacles?
• What determines whether commodity futures contacts succeed or not?

The goal with each of the four digest articles is to provide both industry participants and policy makers with useful insights on the frequently opaque, and always dynamic, commodity markets.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

Oil prices are usually influenced by quite a number of factors. But there have arguably been times when OPEC spare capacity has been the most important factor for driving oil prices. This paper discusses the circumstances when this has likely been the case in the past.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This survey paper discusses the (potential) structural sources of return for both CTAs and commodity indices based on a review of empirical research from both academics and practitioners. The paper specifically covers (a) the long-term return sources for both managed futures programs and for commodity indices; (b) the investor expectations and the portfolio context for futures strategies; and (c) how to benchmark these strategies.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

Until recently, one could only gain expertise in commodity-derivatives relationships if one had worked in niche commodity-processor companies or in banks that specialized in hedging project risk for natural-resource companies. The contribution of this paper is to help fill the knowledge gap in the risk management of commodity derivatives trading. The paper emphasizes the constant challenges to a trader when attempting to navigate the very dynamic flows of both the commodity markets and the prevailing risk environment. The paper also emphasizes that operational controls are paramount in an age of increasing legal and regulatory risk, particularly for firms involved in large-scale commodity derivatives trading.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

Why do some futures contracts succeed and others fail? Although the U.S. futures markets have evolved in a trial-and-error fashion, a survey of relevant research suggests key elements have determined whether particular futures contracts succeeded or failed. This knowledge could be useful for new financial centers as they build successful futures markets. This paper shows that there are three elements that determine whether a futures contract succeeds or not: 1. There must be a commercial need for hedging; 2. A pool of speculators must be attracted to a market; and 3. Public policy should not be too adverse to futures trading.

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The “Research Digest Articles” section concisely covers original research on (1) metals hedging; (2) energy policy; (3) the logistical planning of a grain-trading firm; (4) commodity pricing; and the (5) development of commodity exchanges. The five research summaries were written by the Contributing Editor of the GCARD.

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By Tim R. Adam, School of Business and Economics, Humboldt University of Berlin; Chitru S. Fernando, Michael F. Price College of Business, University of Oklahoma; and Jesus M. Salas, College of Business & Economics, Lehigh University

As summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this article, the authors find a counterintuitive result. While one might expect that firms with both an informational advantage and a robust financial condition to use these competitive advantages to vary their hedging programs according to their market views, the researchers, in fact, find the opposite result. This finding should be of interest to investors in gold equities, who should probably have a skeptical view regarding a firm’s decision to “selectively” hedge, which the authors also refer to as speculation.

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By Fernando H. Avalos, Bank for International Settlements (BIS), and Marco J. Lombardi, BIS

As summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this paper, the authors examine whether one might attribute at least some of the past spikes in corn prices to renewable fuel mandates in the US. The authors provide statistical evidence that corn price dynamics changed after these mandates were put into effect: namely, corn prices began having a stronger response to global demand factors that, in turn, drive demand for crude oil. This increased connection between oil prices and a food staple is an important public policy issue. Although the authors do not suggest policy innovations, one might conclude that when food prices spike, perhaps there should be a temporary trigger to divert corn stocks to food rather than fuel.

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By Nicolas Merener, Universidad Torcuato Di Tella, School of Business, Buenos Aires, Argentina; Ramiro Moyano, Grupo Los Grobo (Argentina); Nicolas Stier-Moses, Universidad Torcuato Di Tella, School of Business, Columbia University, New York, and CONICET (Argentina); and Pablo Watfi, Universidad Torcuato Di Tella, School of Business, and Universidad de Buenos Aires (Argentina)

As summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In the paper, “Optimal Trading and Shipping of Agricultural Commodities,” the authors use a case-study approach to show the benefits of jointly planning trading and logistics for a specific Argentinian grain-trading firm. Given the low profit margins of such firms, such an approach should be of interest to comparable firms in Latin America. The paper’s methodology may also be applicable to large firms in other geographic locations, which are similarly involved in the trading and shipping of grain.

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By Marcel Prokopczuk, Leibniz Universität Hannover (Germany) and ICMA Centre, University of Reading (UK), and Yingying Wu, Xi’an Jiaotong Liverpool University (China)

As summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this study, the authors examine what potentially drives convenience yields. Typically, convenience yields are regarded as the benefit that a holder of commodity inventories receives for being able to avoid the cost of potential stock-outs. The authors examine to what extent commodity-specific and broad macroeconomic variables can explain the variability of convenience yields for a set of commodities. Amongst the authors’ results are that convenience yields (in all cases but one commodity) “exhibit statistically significant positive relationships with” expected inflation and expected industrial production in the US. This is a helpful result for investors whom are interested in choosing futures strategies that provide exposure to key macroeconomic variables.

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By Sostine Ngabirano, Lecturer of Law, Uganda Christian University

As summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this article, the author questions to what extent a government should be “hands off” in the development of commodity exchanges. Given the scale of institutional development required for the establishment of a commodity exchange, the author is skeptical about limiting the government’s role. In the Chicago model, the government’s role is limited to providing the relevant legal framework and oversight functions. Instead, the author advocates an approach in which commodity exchanges are government-run. In making his case, the author compares the experience of two African countries.

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By Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In early 2015, the J.P. Morgan Center for Commodities (JPMCC) at the University of Colorado Denver Business School established a prestigious Research Council, which, in turn, consists of distinguished academics and accomplished practitioners across commodity segments. The JPMCC’s Research Council has thus far met in April and December 2015, and is chaired by Professor Colin Carter, University of California, Davis and co-chaired by Dr. Margaret Slade, Professor Emeritus, Vancouver School of Economics, University of British Columbia. In this issue of the GCARD, we cover the agricultural panel’s presentations from April 2015, which were delivered by distinguished academic and practitioner members of the Research Council. Future issues of the GCARD will cover academic panels on energy, metals-and-mining, and on renewable energy.

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Summarized by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

At the April 2015 J.P. Morgan Center for Commodities’ (JPMCC’s) Research Council meeting, Professor Brian Wright, University of California, Berkeley, discussed the puzzling behavior of grain prices during the last 10 years. Mr. Peter McCallum, Bunge Limited, moderated the session while Professor Colin Carter, University of California, Davis, and Ms. Nancy DeVore, DHF Team, LLC, discussed Wright’s research from both academic and practitioner perspectives, respectively.

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By Andy Hecht, Chief Market Strategist, Carden Capital and Carden Futures; and Subject Matter Expert, “Foundations of Commodities” Professional Education Program, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

Undergraduate and graduate degrees in business rarely offer an in-depth exploration of commodity markets. This article argues that a supplemental professional education in the commodity markets is not only needed, but is also imperative for a well-rounded business education.

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By Robert Greer, Scholar in Residence, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This article advocates that investors take a practical and informed approach to understanding the rebalancing aspect of commodities allocations so as to be better positioned to harness the real returns of this critical (but sometimes difficult to evaluate) asset class.

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This issue’s “Editorial Advisory Board Commentaries” section of the GCARD includes articles from two accomplished members of the board. This issue’s authors are (1) Jan-Hein Jesse, Founder, JOSCO Energy Finance and Strategy Consultancy, Amsterdam, and an international expert for the International Energy Agency, Paris; and (2) Richard Heckinger, Associate Editor, Journal of Financial Market Infrastructures, and a member of the Working Group on Financial Markets for the Federal Reserve Bank of Chicago.

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By Jan-Hein Jesse, Editorial Advisory Board Member, Global Commodities Applied Research Digest

This article describes the incumbent and new-entrant crude oil benchmarks at a time the oil markets are going through a period of great turbulence. The article starts with an introduction about the current state of the industry and market, including a description of benchmarks and the price discovery process in general. The next sections describe each benchmark – WTI, Brent, and Dubai in more detail. The article ends with the pending introduction of Shanghai crude oil futures contracts, which may create a new benchmark for Asian markets.

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By Richard Heckinger, Editorial Advisory Board member, Global Commodities Applied Research Digest

The liquidation and settlement of claims stemming from the collapse in October 2011 of the futures commission merchant and broker–dealer entities of MF Global (MFG) Group took nearly four years to settle. Various investigative initiatives have revealed evidence that customer monies were probably used at times to fund the proprietary trading of the firm in violation of law and regulation in certain jurisdictions and contrary to international principles. This paper examines the conflicting business objectives of MFG overall, its proprietary trading strategies and its eventual collapse, with some lessons learned.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In the inaugural issue of the GCARD, the Contributing Editor interviews Dr. Colin A. Carter, who became the Chair of the J.P. Morgan Center for Commodities’ Research Council in the Fall of 2015. Dr. Carter is also a Distinguished Professor of Agricultural and Resource Economics at the University of California, Davis where he has been a researcher and educator for over 30 years. Professor Carter’s research covers the grain and livestock sectors in China as well as the economics of biotechnology, global agricultural commodity markets, and biofuels policy in the United States.

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