Energy Commodity Prices
The speculative demand from financial investors is a contributing factor of extreme price changes in the energy commodity markets. This is a key finding of a MCC study.
Berlin. The speculative demand from financial investors is a contributing factor of extreme price changes in the energy commodity markets. Further, conventional supply and demand fundamentals cannot adequately explain the simultaneous occurrence of extreme events in several energy markets. These were the key findings of a study conducted by Nicolas Koch, researcher at the Mercator Research Institute on Global Commons and Climate Change (MCC), and published in the journal Energy Economics.
According to Koch, price spikes on the energy commodity markets go hand in hand with massive hedge fund purchases, and price dips with massive hedge fund sales. In times of crisis, a fall in prices is then additionally exacerbated by a rush by the financial market actors, faced with liquidity squeezes, to sell various commodities at the same time, in turn feeding a downward spiral in all the commodity markets.
The author examines the extreme price volatility that pervaded the years 2006 to 2012 in the energy markets. Oil, for example, fell from a record high of US$134 per barrel in mid-2008 to US$34 in January 2009, only to pass the US$100 mark yet again two years later—a range of movement unseen since the 1970s energy crisis. The study focuses on the six energy products that are of the most interest to investors and that are main components of the S&P Goldman Sachs Commodity Index: heating oil, Brent crude oil, WTI crude oil, gasoil, gasoline and natural gas.
The results could be of particular importance to industry. “The enormous price hikes cannot be explained solely by the real demand coming from booming emerging countries such as China,” says Koch . Rather, the massive growth of futures markets for energy commodities has gained significance. This is due to the fact that financial investors are now also operating on the energy markets in order to diversify their existing portfolios. “The financial markets are now targeting commodities as investment markets. In this way, an incredible amount of capital is pumped into the market,” says Koch.
In addition, the study provides empirical support to the G20 countries in their efforts toward a tighter regulation of commodity derivatives trading. “However, rigid rules for the purchase and sale of energy commodities by financial investors would only be justified if the speculations were actually the main cause of the extreme price fluctuations,” says Koch. To this end, further research is necessary.
The MCC explores sustainable management and the use of common goods such as global environmental systems and social infrastructures in the context of climate change. Five working groups conduct research on the topics of economic growth and development, resources and international trade, cities and infrastructures, governance and scientific policy advice. The MCC was jointly founded by the Mercator Foundation and the Potsdam Institute for Climate Impact Research (PIK).