Summer 2019

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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