Thursday, December 13, 2012

How to Manipulate Non-storable Commodities Markets

From September's "The Paradox of Profit Margins and Another Look at the Theory of Everything":
...If you're interested in the effect of hoarding on commodities prices Janet Netz, PhD did a paper I liked, "The Effect of Futures Markets and Corners on Storage and Spot Price Variability". I'll see if we have an ungated copy.

Remember, the spectrum runs from storage to hoarding to market corners.
And corners in commodities refers to physical, you can't corner a commod by simply buying futures or forwards, you also have to take up the physical supply.
Conversely, squeezes are accomplished in the futures..

A couple decent papers on this aspect of the abundance theory are:
"Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners" and
"Market Manipulation, Bubbles, Corners and Short Squeezes"
The only way to combat abundance is with artificial scarcity, i.e. manipulation....
Well we don't have an ungated copy of the Netz but we do have a snappy little 32 page paper by Craig Pirrong who you may know by his nom de blog The Streetwise Professor. His is one of the few blogs that posts on Gazprom more than we do though we probably have more on Enron.

Via the University of Houston's Bauer College of Business:

Manipulation of Power Markets
The deregulation of wholesale power markets has sparked trading in power derivatives.Power markets are susceptible to manipulation by both large longs and large shorts when derivatives are traded. The non-storability of electricity implies that manipulation of power markets differs in many ways from manipulation of markets for traditional storable commodities such as copper. Because of non-storability, manipulators of power markets must be producers of power, so speculative corners are not possible. Moreover, a manipulator must have market power in generation.Unlike storables markets, power markets are simultaneously vulnerable to short and long manipulation. Manipulation is most likely when power output nears system capacity and can have dramatic effects on prices. The differences between manipulation in power and storables markets implies that different regulatory structures are required to reduce manipulation efficiently. Vertical disintegration (combined with limits on the size of the long positions owners of generation can acquire) is probably the most efficacious and efficient way to reduce manipulation in power markets.

Amazingly Prof. Pirrong wrote this a couple months before the California Electricity Crisis of 2000-2001 began!

It was things like this that I was thinking of when I wrote the headline "Storage: How to Hoard Electricity (GE; SI)" back in August.