Essays on commodity and energy markets: Commodity pricing, financialization, and fundamental drivers

Abstract

The present thesis addresses three key questions on commodity price movements: How can short-term commodity price changes be explained? What is the influence of financial speculation on commodity prices and what are the fundamental drivers of long-term commodity price developments? To answer those questions the thesis consists of three self-contained chapters. Chapter 2 adopts a one-sided representation of the generalized dynamic factor model to extract the common movement of thirty-one commodity futures’ returns. It shows that the importance of this common factor increased during the 2008 financial crisis and that this factor is increasingly correlated to changes in gold and oil prices. Even more important, first indications of an asset pricing model for individual commodity futures returns have been found based on common factors of the energy and agriculture sector. These results suggest a recent weakening of the heterogeneity assumption of commodity prices and expand recent findings of the commodity pricing literature. Based on a panel analysis of nonstationarity in idiosyncratic and common components Chapter 3 extracts the co-movement of seventeen agriculture commodity futures returns and develops a measure of financialization based on weekly commodity index traders’ long open interest. It suggests that the influence of index speculation on the common factor of agriculture commodity futures is strongest during agriculture price peaks in 2008 and 2011. To avoid financial speculation directly affecting commodity price changes, the relative share of commodity index traders’ long open interest should not be significantly higher than 28%. In contrast to existing literature, Chapter 4 focuses on the Energy Return On Investment (EROI) of oil, to identify fundamental drivers of non-fuel commodity prices. Relying on a price-based EROI of oil, Chapter 4 assesses the effect of changes in the EROI on both, an index of non-fuel commodities and individual commodity prices between 1900 and 2014. It suggests that commodity prices depend on the amount of surplus energy available to economies. The lower the EROI, the higher are commodity prices. During times of strong economic growth, the effect of changes in the EROI of oil on commodity prices is lower. However, this might have serious consequences in times of weakening economic growth and decreasing EROI. Simultaneously considering GDP growth rates and the EROI of main energy sources might help to estimate long-term effects of a changing energy supply mix on commodity price developments.