Commodity Prices and Competitive Storage

We consider in this chapter a model of rational speculative activity in commodity markets. The salient feature of this model is the non-negativity constraint on storage held by competitive traders. Under random fluctuations on the supply or demand side, traders are supposed to select inventory holdings based on the expectations of future price changes. The equilibrium price for this model is determined as a decreasing function of the current availability defined as the sum of storage and commodity supply per period. Under stochastic supply shocks, the model-generated autocorrelation of prices proves to be not high enough to match the observed time series of commodity prices. In contrast, the model predictions are relevant to persistent demand shocks caused by fluctuations of economic activity and income growth.