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Forward curves, scarcity and price volatility in oil and natural gas markets

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  • Geman, Hélyette
  • Ohana, Steve
Abstract
The role of inventory in explaining the shape of the forward curve and spot price volatility in commodity markets is central in the theory of storage developed by Kaldor [Kaldor, N. (1939) "Speculation and Economic Stability", The Review of Economic Studies 7, 1-27] and Working [Working, H. (1949) "The theory of the price of storage", American Economic Review, 39, 1254-1262] and has since been documented in a vast body of financial literature, including the reference paper by Fama and French [Fama, E.F. and K.R. French (1987) "Commodity futures prices: some evidence on forecast power, premiums and the theory of storage", Journal of Business 60, 55-73] on metals. The goal of this paper is twofold: i) validate in the case of oil and natural gas the use of the slope of the forward curve as a proxy for inventory (the slope being defined in a way that filters out seasonality); ii) analyze directly for these two major commodities the relationship between inventory and price volatility. In agreement with the theory of storage, we find that: i) the negative correlation between price volatility and inventory is globally significant for crude oil; ii) this negative correlation prevails only during those periods of scarcity when the inventory is below the historical average and increases importantly during the winter periods for natural gas. Our results are illustrated by the analysis of a 15Â year-database of US oil and natural gas prices and inventory.

Suggested Citation

  • Geman, Hélyette & Ohana, Steve, 2009. "Forward curves, scarcity and price volatility in oil and natural gas markets," Energy Economics, Elsevier, vol. 31(4), pages 576-585, July.
    • Handle: RePEc:eee:eneeco:v:31:y:2009:i:4:p:576-585
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    References listed on IDEAS

    as
    1. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, September.
    2. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-651.
    3. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
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    5. Holbrook Working, 1948. "Theory of the Inverse Carrying Charge in Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 1-28.
    6. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    7. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66(3), pages 233-233.
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