How high do carbon prices need to be?

Putting a price on carbon places the burden for carbon emissions released into the atmosphere (the environmental externality) firmly on those responsible. What is known as the polluter pays principle.

But instead of dictating who should reduce emissions, where and how they do it, a carbon price provides a price signal. If emission cuts fail to meet targets then the price of carbon will rise, and vice versa if targets are overachieved. Polluters must then decide for themselves whether to stop their carbon emitting activities altogether, act to reduce their emissions, or simply carry on regardless and pay for it via the carbon price. read more

Why Europe is now the marginal buyer of commodities

The seaborne trade in dry bulk commodities provides a strong indication of the changing dynamics in global commodity demand. The import of dry bulk commodities (iron ore, coal, grains and minor bulks such as fertiliser) by ship accounts for approximately one-third of overall dry bulk trade, with the rest being transported across land across fixed routes borders (for example, by truck and rail).

The seaborne trade gives a strong indication of who the marginal buyer in the market is. That kind of information is important to know if you want to understand the motivations of different physical commodity market participants, and how committed they are. read more

To herd or not to herd: How skewed incentives result in biased forecasts

First published on ChAI

“Forecasts usually tell us more of the forecaster than the future.” – Warren Buffet

Commodity market forecasters, like others who offer their views on the outlook for other financial markets are subject to several specific behavioural biases. These include confirmation bias (seeking out information that confirms our own worldview and reject or ignore any disconfirming evidence), recency bias (expecting the future to look very similar to the recent past), and theory-induced blindness (factors important in driving historical past are assumed to have the same weighting in the future). These and many other emotional and cognitive biases can result in poor predictions, influenced only by the individual biases of the forecaster. read more

Bloom times ahead for cotton

Amid the stratospheric rise, and fall of the lumber market, a surge in the price of corn and other grains, multi-year high energy prices and sharply higher industrial metal prices one of the few corners of the commodity market yet to get much attention are ‘soft’ commodities. One market that is flying under the radar is the cotton market, and here it is experiencing a supply side shortfall due to concerns about a major producer, weather related disruptions and a post-lockdown demand surge. read more

Explainer: The US Strategic Petroleum Reserve (SPR)

The USA is one of few countries in which the government stores large volumes of crude oil. The Strategic Petroleum Reserve (SPR), is the largest emergency supply in the world with the capacity to hold up to 727 million barrels of oil.

In the aftermath of the Arab oil embargo of 1973-74 and the resulting oil price shock (in which the price of imported crude tripled), the US government decided it would be wise to invest in an emergency reserve of crude oil. In 1977 the government began to fill vast salt caverns, deep underground across four sites near the coast of Texas and Louisiana. read more

Shifting seasons: Why you should avoid paying too much attention to commodity market seasonality

Seasonal trends are often used by investors to give an indication of where prices may move next. Take the example of gold. The middle of the year tends to mark an inflection point between gold and the US dollar. The chart below illustrates that the period between June and October is usually very strong for gold prices, at the expense of US dollar weakness. At other times of the year gold and the dollar broadly move in the same direction.

There is a good reason why prices might move higher towards September and October. Diwali (also known as the Festival of Lights) is a major shopping season in late October or early November. Families typically splash out on gold jewellery. Merchants and jewellers purchase gold during the third quarter of the year in anticipation of a surge in demand . read more