Commodity Futures

A reader asked: “Have you ever undertaken a study of the EIA Short Term Energy Outlook (STEO) or other EIA forecasts to evaluate the degree of accuracy one could reasonably expect from them?” More…

Do commodity hedgers offer a reliable risk premium to speculators via commodity futures? In other words, can commodity futures traders generate dependable returns by trading against the net position of hedgers and with the net position of speculators as summarized in the weekly Commodity Futures Trading Commission’s Commitments of Traders (COT) reports? In the February 2009 version of their paper entitled “The Performance of Simple Dynamic Commodity Strategies”, Devraj Basu and Joelle Miffre construct real-time trading strategies based on the aggregate positions of hedgers and speculators for liquid commodity futures. They test the relative informativeness of hedgers and speculators and the effectiveness of applying active strategies to commodities that are backwardated (positive roll return) and contangoed (negative roll return). Using Wednesday closing prices on near-maturity contracts for 13 commodities (identified on the chart below) and weekly COT hedgers/speculators position data over the period 1994-2006 (1999-2006 for corn), they find that: More…

Does combining two commodity futures trading signals shown to be effective in prior research, momentum and roll return (term structure), improve on both? In the May 2008 version of their paper entitled “Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals”, Ana-Maria Fuertes, Joëlle Miffre and Georgios Rallis measure the combined value of momentum and roll return signals in the design of commodity futures trading strategies. They test combinations that iteratively buy backwardated (positive roll return) winners and short contangoed (negative roll return) losers. Using daily closing prices on the nearby, second nearby and distant contracts for 37 commodities as available over the period January 1979 through January 2007, they find that: More…

Reader Henry Bee asked: “You have probably heard of the historical 6:1 crude oil/natural gas price ratio. This relationship is said to be mean reverting based on the thermal equivalence of the two commodities. Does this ratio have any predictive power for the future prices of oil or natural gas? If there is no predictive power for this ratio, then it could mean that the thermal equivalence itself shifts over time. And hedge funds who are long natural gas right now are making a huge fundamental mistake.” If there are relationships, we hypothesize that a high (low) crude oil-natural gas price ratio should predict future changes in the prices of natural gas of crude oil to decrease (increase) the ratio. Using the monthly composite U.S. refiner cost of crude oil (nominal dollars per barrel) and the monthly U.S. wellhead natural gas price (nominal dollars per thousand cubic feet) for January 1976 through April 2008 (388 months), we find that: More…

Do commodity futures prices react systematically to news about the overall U.S. economy? If so, how might investors/traders exploit the reactions? In their March 2008 working paper entitled “How Do Commodity Futures Respond to Macroeconomic News?”, Dieter Hess, He Huang and Alexandra Niessen investigate the impact of surprises in 17 U.S. macroeconomic indicators on two broad commodity futures indexes: (1) the equally-weighted CRB Index, and (2) the production-weighted S&P GSCI Commodity Index. Using macroeconomic news reports (surprise components), contemporaneous daily commodity index prices and various measures of the economic cycle over the period 1989 to 2005, they conclude that: More…

Do the big commodity futures speculators make money? If so, how? In their April 2008 draft paper entitled “Returns to Speculators in Commodity Futures Markets: A Comprehensive Revisit”, Christof Sigl-Grüb and Dirk Schiereck investigate the performance and performance drivers for large speculators in 22 commodity markets over the last 15 years. Using aggregate position data for non-commercial traders (large speculators) from the weekly Commodity Futures Trading Commission Commitments of Traders (COT) reports and contemporaneous daily futures price data over the period 10/1/92 to 3/6/07, they conclude that: More…

We occasionally select for retrospective review an all-time “best selling” research paper from the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the June 2007 paper entitled “The Fundamentals of Commodity Futures Returns” (download count over 2,500) by Gary Gorton, Fumio Hayashi and Geert Rouwenhorst. Commodity futures are derivative, short-maturity claims on real assets. In this paper, the authors apply the theory of storage to investigate relationships between the physical inventories of these assets and the returns to traders in the associated commodity futures. Using monthly data for over 30 commodity futures and associated physical inventories as available between 1969 and 2006 and data from the weekly Commodity Futures Trading Commission Commitments of Traders (COT) reports, they conclude that: More…

The zero-sum S&P 500 futures market involves three categories of players: commercial hedgers; non-commercial traders (large speculators); and, non-reportable traders (small or retail speculators) representative of the public. The Commodity Futures Trading Commission collects and publishes their aggregate positions (short, long and spread) for each asset in a weekly Commitment of Traders report. Are the behaviors of these groups in trading S&P 500 index futures reliable indicators of future stock market direction? If so, is this predictive power stable over time? Using the Historical Commitments of Traders Reports Futures and Options Combined available from CFTC and corresponding S&P 500 index data from late March 1995 (the earliest available for futures) through March 2008 (a total of 675 weeks), we find that: More…

Do commodity futures exhibit short-term momentum and long-term reversion, as do stocks? In the August 2006 version of their paper entitled “Momentum Strategies in Commodity Futures Markets”, Joelle Miffre and Georgios Rallis examine the profitability of 32 momentum (short-term continuation) and 24 contrarian (long-term reversal) strategies in commodity futures markets. The momentum strategies buy (sell) recently outperforming (underperforming) commodity futures and hold resulting long-short portfolios up to 12 months. The contrarian strategies buy (sell) the commodity futures that underperformed (outperformed) in the distant past and hold resulting long-short portfolios for periods of two to five years. All strategies trade liquid futures contracts with nearby maturities involving 31 commodities, unimpeded by short-selling restrictions often encountered in equity markets. Using futures contract price data spanning 1/31/79-9/30/04, they conclude that: More…

We occasionally select for retrospective review an all-time “best selling” research paper from the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the January 2006 paper entitled “The Tactical and Strategic Value of Commodity Futures” (download count over 2,400) by Claude Erb and Campbell Harvey. Commodity futures are derivative, short-maturity claims on real assets. In this paper, the authors explore the strategic and tactical opportunities that these derivatives present to investors. Using long-run commodity futures return data as available mostly through mid-2004, they conclude that: More…