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CommoditiesMarkets, Performance, and Strategies$
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H. Kent Baker, Greg Filbeck, and Jeffrey H. Harris

Print publication date: 2018

Print ISBN-13: 9780190656010

Published to Oxford Scholarship Online: March 2018

DOI: 10.1093/oso/9780190656010.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 16 October 2021

Fundamentals and Commodity Prices

Fundamentals and Commodity Prices

(p.90) 6 Fundamentals and Commodity Prices

Michael S. Haigh

Oxford University Press

Commodity markets occasionally co-move with the broader macro markets for reasons beyond their own fundamentally driven physical characteristics. This chapter focuses on two related avenues to look beyond the fundamentals of counting barrels, tonnes, bushels, or molecules. The first section uses a principal component analysis to disentangle how fundamentals versus non-fundamentals drive commodity prices and focuses on the crude oil market. The results are intuitive and allow isolating the extent to which supply and demand matter to price changes experienced in the market. Furthermore, the results enable understanding whether the diversification benefits of commodity markets exist in almost real time. Second, given the ability to segment fundamentally driven commodities from others, the chapter focuses on how much supply or demand factors attribute to the fundamental variation in prices. The analysis reveals that, in the oil market, supply concerns drive prices during geopolitical tensions, while demand concerns dominate during economic crises.

Keywords:   commodity price, fundamentals, non-fundamentals, crude oil, supply and demand, principal component analysis

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