How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock

Download or read book How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock written by Mr.Shaun K. Roache and published by International Monetary Fund. This book was released on 2010-09-01 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: How does a commodity market adjust to a temporary scarcity shock which causes a shift in the slope of the futures price curve? We find long-run relationships between spot and futures prices, inventories and interest rates, which means that such shocks lead to an adjustment back towards a stable equilibrium. We find evidence that the adjustment is somewhat consistent with well-known theoretical models, such as Pindyck (2001); in other words, spot prices rise and then fall, while inventories are used to absorb the shock. Importantly, the pace and nature of the adjustment depends upon whether inventories were initially high or low, which introduces significant nonlinearities into the adjustment process.