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The Dynamics of Commodity Spot and Futures Markets: A Primer

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  • Robert S. Pindyck

Abstract

I discuss the short-run dynamics of commodity prices, production, ami inventories, as well as the sources and effects of market volatility. I explain how prices, rates of production, and inventory levels are interrelated, and are determined via equilibrium in two interconnected markets: a cash market for spot purchases and sales of the commodity, and a market for storage. I show how equilibrium in these markets affects and is affected by changes in the level of price volatility. I also explain the role and behavior of commodity futures markets, and the relationship between spot prices, futures prices, and inventory behavior. I illustrate these ideas with data for the petroleum complex - crude oil, heating oil, and gasoline - over the past two decades.

Suggested Citation

  • Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, , vol. 22(3), pages 1-29, July.
    • Handle: RePEc:sae:enejou:v:22:y:2001:i:3:p:1-29
    DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-1
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    Keywords

    Commodity prices; Futures Markets; inventories; volatility; crude oil; gasoline;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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