why do energy futures fall after announcements of unexpected increases in oil reserves?
There’s more supply than people thought before?
I heard a commerical asking to ask congress to repeal some act brought upon by Enron regarding energy in the futures market to help lower oil prices. anyone hear of this ?
BMWhype, Did this actually happen? IMHO, the futures market moves in ways that are hard to attach to a single event. I’ve never heard of the futures market being moved by some sort of global reserves data however I have heard of people partially explaining high commodity prices (both spot & future prices) by the lack of significant new discoveries. So, I guess a huge new discovery (like the north sea or something?) would obviously increase reserves and thus affect futures prices.
It’s an interesting question. On the one hand, if supply goes up, price should go down, so new reserves suggests that oil is not as scarce as thought, so it doesn’t take as much money to get some. That seems like the most likely scenario. On the other hand, futures are supposedly arbitrageable. So new reserves being found shouldn’t change the spot price too much, because that stuff is not really available for consumption today, and the futures price should be the spot price projected into the future at the risk free rate (or the minimum borrowing rate). I suppose the spot price could drop a little because people could put off some consumption until new reserves come online. So this is a situation where the futures price might not necessarily line up with the expected future spot price. I’m not sure which factor dominates here…
bchadwick Wrote: ------------------------------------------------------- > On the other hand, futures are supposedly > arbitrageable. Do you have a source on that? Here’s the iconic counterexample for you: http://www.prmia.org/pdf/Case_Studies/MG_IIT.pdf > So this is a situation where the futures price > might not necessarily line up with the expected > future spot price. In virtually no sense are commodities futures prices expectations of future spot prices.
I’ll look at the article. What I meant, is that futures prices are supposedly determined by arbitrage relationships, not the expected future price (though that can influence through supply and demand pressures on futures contracts). The price of a future should be set so that it will pay sufficiently to pay the principal and interest on money borrowed today to buy the commodity today and pay for storing it until the future is due. The price depends on interest rates today and the spot price today and the storage costs, none of which changes when new reserves are discovered (except perhaps a tiny bit where some of today’s demand slacks off because it can be delayed into the future, when prices are expected to be lower than what they were before the discovery). (DarienH: I see comment 1 (questioning arbitragability) and comment 2 (futures aren’t estimates of future spot prices) as inconsistent - prices are either expected future spot prices, or they are determined by arbitrage - am I forgetting another option?)
lean hogs for delivery in december aren’t exchangeable for lean hogs for delivery in march. arbitrage of physical commodities doesn’t make sense. futures prices of commodities aren’t expectations any more than implied forward rates are expectations of short rates. (much less so in fact)