Energy Commodity Prices Research Articles

Commodity House Prices

This paper studies how commodity price movements have affected the local house prices in commodity-dependent economies, Australia and New Zealand. We build a geographically hierarchical empirical model and find the commodity prices influence local house prices directly and also indirectly through macroeconomic variables. The impacts of commodity price changes are analogous to “income shocks” rather than “cost shocks”. Regional heterogeneity is also observed in terms of differential dynamic responses of local house prices to energy versus non-energy commodity price movements. The results are robust to alternative approaches. Directions for future research are also discussed.

How to Feed the World in 2050: Macroeconomic Environment, Commodity Markets -- A Longer Term Outlook

The recent commodity boom was the longest and broadest of the post-World War II period. Although most prices have declined sharply since their mid-2008 peak, they are still considerably higher than 2003, the beginning of the boom. Apart from strong and sustained economic growth, the recent boom was fueled by numerous other factors; including low past investment in extractive commodities, weak dollar, fiscal expansion in many countries, and, perhaps, investment fund activity. On the other hand, the diversion of some food commodities to the production of bio-fuels, adverse weather conditions, global stock declines to historical lows, and government policies, including export bans and prohibitive taxes, accelerated the price increases that eventually led to the 2008 rally. This paper concludes that the increased link between energy and non-energy commodity prices, strong demand by developing countries - when the current economic downturn reverses course - and changing weather patterns, will be the dominant forces that are likely to shape developments in commodity markets.

Forecasting Energy Commodity Prices Using Neural Networks

A new machine learning approach for price modeling is proposed. The use of neural networks as an advanced signal processing tool may be successfully used to model and forecast energy commodity prices, such as crude oil, coal, natural gas, and electricity prices. Energy commodities have shown explosive growth in the last decade. They have become a new asset class used also for investment purposes. This creates a huge demand for better modeling as what occurred in the stock markets in the 1970s. Their price behavior presents unique features causing complex dynamics whose prediction is regarded as a challenging task. The use of a Mixture of Gaussian neural network may provide significant improvements with respect to other well-known models. We propose a computationally efficient learning of this neural network using the maximum likelihood estimation approach to calibrate the parameters. The optimal model is identified using a hierarchical constructive procedure that progressively increases the model complexity. Extensive computer simulations validate the proposed approach and provide an accurate description of commodities prices dynamics.

Energy Conservation through Motors in Pakistan's Industrial Sector- Need to use of Energy Efficient Motors

ABSTRACT Pakistan is an energy deficit country. The purpose of this research paper is to shed light on current Pakistan’s electrical energy conservation efforts and on potential of electrical energy saving in different sectors, this paper also describes the usage of energy efficient motors technologies for the industrial processes because 30% - 70 % of electricity is consumed by motors load. Different countries use their codes, standards and regulation as voluntarily, mandatorily to conserve electricity but Pakistan yet lacks behind. Keywords Energy Efficiency in motors, industrial motors, Energy audit 1. INTRODUCTION Global warming, fossil fuel depletion, the growth of new large economies interlace the uncomfortable situation on world’s energy outlook, this ultimately makes higher energy commodity prices and economic disruption to the society. The following Fig 1 shows the oil and gas production and demand level, the increasing line showing the demand is increasing incessantly where as production level is decreasing [1,2].

A modeling study of the effect of carbon dioxide mitigation strategies, natural gas prices and steam consumption on the Canadian Oil Sands operations

This paper presents a study that shows the effect of key environmental and operational factors on the Canadian Oil Sands operations for the production of synthetic crude oil (SCO) and commercial bitumen. Using an integrated energy optimization model developed in the GAMS platform, the present study determined the most economical oil schemes and energy commodities configurations at different CO2 capture levels, natural gas prices and steam-to-oil ratios (SOR). The sensitivity of these factors on the different aspects of the Oil Sands operations are explicitly discussed in this work, i.e., SCO unitary energy costs, energy commodity prices, energy plant's configuration. According to the CO2 emission target planned by the Canadian federal government for year 2020 (50 MT of CO2 eq/yr), 38% of CO2 emission reduction with respect to the baseline emission is required from the Oil Sands industry. Similarly, the natural gas price is the operational factor that affects the energy costs associated to every product considered in this study. Furthermore, the SOR factor has a significant impact on the energy production costs of SAGD SCO and commercial bitumen.

Food and Energy Price Shocks: What Other Prices Are Affected?

Sharp rises in energy and other commodity prices have recently ignited concerns about inflation. Will these price increases spill over to other prices more generally? We study the typical responses of different price shocks and assess whether the recent behavior of producer and consumer prices is consistent with historical norms. Our analysis shows that the behavior of various producer and consumer prices since late 2009 has generally matched up with historical patterns. Overall, our findings suggest that effects of the recent energy and commodity price shocks on core consumer prices will be modest going forward.

Overnight Moves: The Bank of Canada Should Start to Raise Interest Rates Now

When the Bank of Canada will begin raising interest rates is looking very different than when it should even though the risks of postponement are growing. If more “no-change” decisions are made by the Bank of Canada regarding its policy interest rate, inflation expectations might begin to slip loose of their 2 percent anchor. Further, with the Fed continuing to hold a near-zero rate, the US dollar is likely to continue its steady slide. If the Canadian dollar moves at least partially with the US dollar, because the Bank of Canada keeps its interest rate close to the federal funds rate, the higher inflation rates of energy and other commodity prices that are currently deemed temporary might start to look permanent.

Welfare Analysis Using Data from the International Comparison Program for Africa

Abstract: This paper uses data from the International Comparison Program 2005 to recover complete own and cross-price and income elasticity estimates for the African continent using the Extended Linear Expenditure System for 12 broadly defined commodities. The results can be used for aggregate welfare comparison in such global models as GTAP (Global Trade Analysis Project) and exercises to infer welfare impact of relative price shocks at the continental level. In a heuristic way also, it is possible to derive a ‘utility-consistent’ global poverty line from the demand function that could be compared with the popular international poverty lines. Results generally indicate that changes in the price of food items could lead to greater welfare loss compared to changes in the price of energy or other commodities. Income elasticity estimates generally fell within bounds usually found from household surveys. At the continental level, the estimated utility-consistent subsistence expenditure is $1.10 a day per person, which is quite close to the $1.08 a day global (international) poverty line used in 2005 to measure absolute poverty.

The long-term implications of the 2007–08 commodity-price boom

The recent commodity-price boom was one of the longest and broadest of the post-World War II period, and, not unexpectedly, it reignited discussions about resource scarcity as well as proposals to ‘manage’ reminiscent of the 1970s. This contribution looks at the factors that are likely to shape commodity markets in the longer term and concludes that a stronger link between energy and non-energy commodity prices is likely to be the dominant force, especially in terms of food prices. Demand by emerging economies is unlikely to put additional pressure on the prices of food commodities, although it may create such pressure indirectly through energy prices. The effect of biofuels on food prices has not been as great as originally thought, but the use of commodities by investment funds may have been partly responsible for the 2007–08 spike.

International Linkages of the Indian Commodity Futures Markets

This paper investigates the cross market linkages of Indian commodity futures for nine commodities with futures markets outside India. These commodities range from highly tradable commodities to less tradable agricultural commodities. We analyze the cross market linkages in terms of return and volatility spillovers. The nine commodities consist of two agricultural commodities: Soybean, and Corn, three metals: Aluminum, Copper and Zinc, two precious metals: Gold and Silver, and two energy commodities: Crude oil and Natural gas. Return spillover is investigated through Johansen’s cointegration test, error correction model, Granger causality test and variance decomposition techniques. We apply Bivariate GARCH model (BEKK) to investtigate volatility spillover between India and other World markets. We find that futures prices of agricultural commodities traded at National Commodity Derivatives Exchange, India (NCDEX) and Chicago Board of Trade (CBOT), prices of precious metals traded at Multi Commodity Exchange, India (MCX) and NYMEX, prices of industrial metals traded at MCX and the London Metal Exchange (LME) and prices of energy commodities traded at MCX and NYMEX are cointegrated. In case of commodities, it is found that world markets have bigger (unidirectional) impact on Indian markets. In bivariate model, we found bi-directional return spillover between MCX and LME markets. However, effect of LME on MCX is stronger than the effect of MCX on LME. Results of return and volatility spillovers indicate that the Indian commodity futures markets function as a satellite market and assimilate information from the world market.

The integration of energy and agricultural markets

AbstractThis article addresses the evolving links between energy and agricultural markets. Prior to 2005, there was little correlation between energy and agricultural commodity prices. In 2006–2008, with the ethanol boom in the United States, there emerged a strong link between crude oil, gasoline, and corn prices. There was little link between ethanol and corn. However, in late 2008 and 2009, the markets changed as ethanol production came under severe economic pressure and 2 billion out of 12 billion gallons of capacity shut down. During this period ethanol became priced more on corn, as the breakeven corn price helped drive the ethanol market. This article explores the drivers in these markets as well as other major issues facing the corn ethanol industry in the United States such as the blend wall. The article concludes with a review of prospects of a future cellulosic biofuels industry.

Wealth Effects in the GCC from Energy Commodity Prices

Oil-exporting countries, including the GCC economies, have experienced a windfall as a result of high oil prices since 2003. Hydro-carbon revenues in the Middle East which has the world’s largest share of oil and natural gas reserves have filtered into their domestic economies through increased government spending and large scale investment projects. However, given the exhaustible nature of energy resorces, long term planning is necessary in order to ensure that the revenues are not spent unwisely.Friedman’s Permanent Income Hypothesis (PIH) helps to connect economic theory to the practical/empirical approach of estimating the effect of higher energy prices on the stock of wealth represented by fossil fuel underground reserves. The PIH states that individuals base their consumption (and savings) decisions not on their current income which may be subject to transitory, short term fluctuations, but on their permanent income, their longer-term income prospects, and an estimate of their future wealth. The same reasoning, mutatis mutandis, can be applied to countries. In this paper we calculate the permanent income effect on the GCC countries deriving from the fluctuations of energy commodity prices and the implications for the future development of this region. Several scenarios are considered – based on assumptions over oil and gas prices and discount rates of income streams.The central result shows that the present value of the hydrocarbon wealth for the GCC countries can be estimated at USD 11.2 trillion, assuming a 3% rate of return (and discount rate) and a price of $50 per barrel (at 2009 constant prices). The analogous value for natural gas reserves assuming a discount rate of 3% and a price $9 per mn Btu stands at USD 7.1 trillion. Hence, the permanent wealth from oil and natural gas reserves under rather conservative assumptions stands at a whopping USD 18.3 trillion, giving GCC the potential to swap their fossil fuel reserves for half of the world’s current (August 2009) stock market capitalization!The energy commodity revenues should not be considered income, but as the transformation of underground wealth into financial wealth. This stream of revenues will be sufficient to finance the transformation of the GCC countries into diversified economies through investments in infrastructure and education. Additionally the revenues will continue to be invested worldwide, with non negligible repercussions on asset valuations and in particular on the continuing restructuring of the world’s financial and corporate sectors.There are a number of important lessons and consequences of the increased wealth of the GCC.• Their higher current and prospective wealth enables the GCC countries and other energy exporters to use their wealth to invest in economic diversification to reduce their vulnerability to oil and gas price fluctuations.• The increased financial wealth of the GCC calls for increased investment and resources to be devoted to wealth and asset management and control.• The fiscal situation and debt capacity of the GCC countries should be analysed taking into consideration the vast current and prospective wealth of the GCC countries.• The recent financial crisis has demonstrated the importance of the financial cushion provided by the international financial assets that the GCC built up over 2003-2008 in helping them weather the global economic and financial crisis.

Alternative Investments: How to take Advantage of the Correlation of Oil Price and Alternative Energy Companies Valuation

Research PurposeThis research aim to build a financial viable product on the idea that the price of energy commodities has a predictive power on the stock value of renewable energy focused companies.Research DesignThe research will first give a look at the green energy market, and show the growth potential it bears. Then by creating a green companies fund on objective criteria, we will have a base on which to test the relation between this fund and the price of energy commodities (Crude oil Brent will be used for practical purposes). The research will use linear regression and logarithmic monthly returns as a basis for the computation of the relation. Furthermore, the returns used for assessing tthe relation between the portfolio and oil will be corrected for the benchmark return (S&P 500).FindingsThe research has provided some interesting results:a) The portfolio has over-performed its benchmark (S&P500) during the period, possibly meaning that the green energy market is growing quicker than the economy.b) The R squared of the corrected returns is above 11%, showing us a strong relation between the two types of assets.c) The R squared of the corrected returns with one month lag is about 4%, giving our model some predicative value that might be converted in some excess return possibility for a financial product.Research Limitationsa) One of the reasons of the outperformance of the portfolio ( 280% compared to -25% for S&P 500) could be the criteria for the selection of the companies to be put in the fund. Indeed, by selecting only companies that have existed for 10 years at least and have a minimum market capitalisation, we chose only the successful ones, hence not representing the market in its full picture.b) Considering the price of oil as an indicator for the whole fossil energy market might put a bias on the model.c) Using the S&P 500 as a benchmark for the portfolio’s return is bias, as the companies’ size and country aren’t all comparable to the components of the S&P 500Research ImplicationsThis research is based on the intuition that green energy is an alternative to fossil fuels, and that one of the motivations for people to switch to renewable energy from fossil fuels is the price of the latter. The research also implies that the value of the companies’ stocks is related to short term trends.Originality and ValueThe results that came out of this study are positive as they tend to show a link between the returns of oil and the returns of our portfolio. Furthermore, a relation of these returns when a lag is imposed shows that some part of the market takes time to adapt to the news, and thus creating an opportunity to build an investment model on this basis.

Multi-layer model of correlated energy prices

In this article we develop an extension of the affine jump–diffusion modeling framework and use it to build an intuitive and tractable model of an energy price complex. The development is motivated by the need to model prices of electricity while capturing their dependence on the price of other energy commodities. Such a model is essential for valuing a range of typical derivatives traded in the electricity markets: cross-commodity spread options, cross-location spread options, fuel-switching powerplants, etc. We give an approximate pricing method for these derivatives together with precise error bound estimates.

Numerical Methods of Option Pricing for Two Specific Models of Electricity Prices

In this work, two models are proposed for electricity prices as energy commodity prices which in addition to mean-reverting properties have jumps and spikes, due to non-storability of electricity. The models are simulated using an Euler scheme, and then the Monte-Carlo method is used to estimate the expectation of the discounted cash-flow under historical probability, which is considered as the option price. A so called random variable simulation and a control variate method are then used to decrease, the discretization error and the Monte-Carlo error, respectively. As the option prices satisfy PDE's associated with the models, by solving these PDE's, numerically, we can find the option prices by a second method, thereby being able to make comparisons.

The UK Market for Natural Gas, Oil and Electricity: Are the Prices Decoupled?

After opening up of the Interconnector, the liberalized UK natural gas market and the regulated Continental gas markets became physically integrated and the Continental gas price became dominant. However, in an interim period - after deregulation of the UK gas market (1995) and the opening up of the Interconnector (1998) - the UK gas market had neither government price regulation nor a physical Continental gas linkage. We use this period - which for natural gas markets displays an unusual combination of deregulation and autarky - as a natural experiment to explore if decoupling of natural gas prices from prices of other energy commodities, such as oil and electricity, took place. Monthly price data in the period 1995-1998 indicates a highly integrated market where wholesale demand seems to be for energy rather than a specific energy source.

Energy, the Exchange Rate, and the Economy: Macroeconomic Benefits of Canada's Oil Sands Production

This paper describes potential benefits from Canada's expanding oil sands production, higher energy exports, and further improvements in the terms of trade. Contrary to the previous Canadian exchange rate literature, this paper finds that both energy and nonenergy commodity prices have an influence on the Canadian dollar, and some upward pressure on the exchange rate would therefore be expected. Model results suggest, however, that the impact on other tradable goods exports is limited.

Energy, the Exchange Rate, and the Economy: Macroeconomic Benefits of Canada'S Oil Sands Production

This paper describes potential benefits from Canada's expanding oil sands production, higher energy exports, and further improvements in the terms of trade. Contrary to the previous Canadian exchange rate literature, this paper finds that both energy and nonenergy commodity prices have an influence on the Canadian dollar, and some upward pressure on the exchange rate would therefore be expected. Model results suggest, however, that the impact on other tradable goods exports is limited.

Energy Commodity Prices

Energy commodity prices have been rising at an unprecedented pace over the last five years. As oil supplies tighten and prices frequently break new highs, major oil companies have recently unveiled a flurry of multi-billion dollar deals for new projects whose target is not oil but natural gas. This article explores new sources of natural gas as well as whether natural gas and oil prices exhibit mean-reversion. The author notes that the three major unconventional gas resources identified so far are coalbed methane (CBM), tight gas sands, and organic gas shales. She concludes that with prices of oil approaching $70 per barrel at the end of August 2005 and oil futures trading above $70 on the NYMEX, these alternative sources of natural gas appear today to be a partial answer to the world energy needs.

STORAGE OPTIONS VALUATION USING MULTILEVEL TREES AND CALENDAR SPREADS

We present a detailed description of storage options valuation using a multilevel tree methodology which takes into account both the stochastic evolution of the energy commodity price underlying the storage contract or asset, as well as the storage facility operational constraints. We derive also a quasi-analytical solution for the storage value as a strip of calendar spread options, which is applicable when the storage constraints are ignored. The two valuation methodologies are applied within the framework of a one-factor and a two-factor diffusion model for the commodity price. As an interesting example of a path-dependent option with American exercise style, we take a look at the storage option injection and withdrawal exercise price boundaries and examine how these exercise decision boundaries are influenced by variations in the model's input parameters. We provide numerical results illustrating the dependence of the storage option value on the price model parameters, and interpret the observed parameter dependence using the calendar spreads formula as a useful analysis tool. We analyze and present numerical results regarding the dependence of the option value on the storage operational parameters.