The Great Debate

Speculators abandon oil for the moment

August 23, 2010

Bullishness about the short-term prospects for crude is evaporating among banks and hedge funds, as the market fails to sustain rallies above $80 and girds for widespread refinery shutdowns to work off bulging gasoline stocks.

Dr Strangelove and the threat of deflation

August 13, 2010

Fear of deflation haunts investors and stalks the halls of the Federal Reserve in Washington.

Cheap credit cannot restore broken illusions

August 13, 2010

Hans Christian Andersen’s fairy tale about the “The Emperor’s New Clothes” is a good explanation for the spectacular expansion and implosion of the bubble economy in the 2000s.

Uncertainty, distributions and fat-tails

August 6, 2010

In a thoughtful article published this week in the Financial Times, PIMCO Chief Executive Mohamed El-Erian and Columbia Economics Professor Richard Clarida explore the implications of a shift in the shape of investors’ and policymakers’ expectations about the future.

The wonderful world of force majeure

August 6, 2010

Russia’s decision to ban grain exports will be welcomed by some physical grain traders because it allows them to declare “force majeure”, walking away from wheat supply contracts that had become increasingly uneconomic to perform.

Roll losses swallow up commodity inflows

July 30, 2010

Total assets under management in commodity-tracking indices and exchange-traded products (ETPs) have stalled over the last nine months, as roll losses swallow up fresh money inflows.

Commodities should be short-term investments

July 29, 2010

Commodity indices and exchange-traded products (ETPs) should be regarded as short- to medium-term investments rather than long-term strategies, as a quick glance at performance over the last 10 years shows.

from The Great Debate (Commentary):

Commodities should be short-term investments

July 28, 2010

Commodity indices and exchange-traded products (ETPs) should be regarded as short- to medium-term investments rather than long-term strategies, as a quick glance at performance over the last 10 years shows.

Contango and the real cost of carry

July 22, 2010

– John Kemp is a Reuters market analyst. The views expressed are his own –

For the last two years, the contango structure embedded in futures prices has far exceeded the actual cost of owning physical raw materials such as crude oil, aluminium and copper, explaining the strong interest from traders and hedge funds in owning inventories or the warehouses, elevators and tank farms that store them. Well-connected banks and physical traders have exploited the difference between the actual cost of financing, storing and insuring raw materials and the implied cost in upward sloping futures prices, as a source of comparatively low risk profits.
It has helped commodity markets carry record stocks and supported overproduction of many raw materials through the recession and the early stages of the recovery with only minimal downward pressure on prices.But the days of physical commodity storage as a licence to print money are ending. An increasing number of other institutions and hedge funds have created their own “virtual storage” plays, with negative positions in the spreads, or a short position against commodity indices or customised swaps. As storage plays become more crowded, the contango will continue to erode gradually until it resembles the actual costs of finance, storage and insurance, and this source of relatively risk-free profit is removed.

Morgan Stanley commods risk hits post-crisis high

July 21, 2010

John Kemp is a Reuters market analyst. The views expressed are his own.

Morgan Stanley reduced the amount of risk-taking in its trading book last quarter, but only marginally, and boosted risk in commodities to its highest level since the financial crisis struck in summer 2008, according to the firm’s earnings release.