On the behavior of commodity prices when speculative storage is bounded |
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| Institution: | 1. Department of Industrial Economics, University of Stavanger, Norway;2. Department of Mathematics and Natural Sciences, University of Stavanger, Norway;1. Cornell University, Ithaca, NY, USA;2. Google Inc., Mountain View, CA, USA;1. Virginia Tech, Department of Economics, 3122 Pamplin Hall (0316), Blacksburg, VA 24061, USA;2. Universität Heidelberg, Alfred-Weber-Institute, Bergheimer Str. 58, 69115 Heidelberg, Germany;1. Instituto de Estadística, Universidad de Valparaíso, Chile;2. Instituto de Matemática e Estatística, Universidade Federal de Goiás, Brazil;3. Departamento de Estatística, Universidade Federal do Piauí, Brazil;4. Facultad de Ingeniería y Ciencias, Universidad Adolfo Ibáñez, Chile |
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| Abstract: | This paper investigates the implications of bounded speculative storage, storage bounded from below at zero and above at a capacity, on commodity prices. Binding capacity mirrors the non-negativity constraint on storage and leads to negative price spiking and higher volatility when the market is in deep contango, i.e. low current prices at high stock levels. With bounded storage there is no need to restrict storage to be costly to ensure a rational expectations equilibrium. This allows the model to cover a wide range of storage technologies, including free and productive storage. We also provide an alternative expression for speculative prices that highlights the key role of the storage boundaries. The competitive equilibrium price is the sum of discounted future probability weighted boundary prices. The boundary prices can be viewed as dividends on commodities in storage reflecting the realization of economic profits from storage. |
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| Keywords: | Commodity prices Storage Capacity Rational expectations |
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