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How commodities trade: Speculators, squeezes and corners

Understanding Commodities / Module 6: How commodities trade Part 4 of 5

Speculators, squeezes and corners

Speculators take on the risk that hedgers shed. Most of the time they deepen markets and may even steady prices. But a futures contract is a promise to deliver a finite stock in a particular place, and whoever controls that stock can make the promise very expensive to keep. The cases here, from Chicago soybeans to London nickel, show how squeezes work and why they keep recurring.

4.1 Speculators provide liquidity, and the evidence that they drive prices is weak

Speculators arrive with no physical exposure and take on price risk for profit. Radetzki and Wårell see them as transferring risk to those better able to bear it. Margins stretch a speculator's money at least fivefold compared with physical dealing. Beyond filling the gap between short and long hedges, most of their positions are bets against other speculators, which adds continuity and liquidity.

Theory suggests that successful speculation steadies prices. After harvest, speculators bid up futures until the contango pays for storage, which supports the spot price; at the top of a boom they bid futures down, making stocks unprofitable to hold and releasing them. Speculation destabilises only if speculators are persistently wrong, in which case they lose money and leave.

Financial investors changed the scale. Commodity assets under management rose from about $13 billion in 2003 to $450 billion in 2011, mostly in index products that hold futures and roll them before expiry. Tilton and Guzmán show the channel by which futures buying reaches spot: in a strong contango, investors can buy spot and sell futures, so futures and spot move together.

Did this money cause the 2000s boom? Some studies found brief bubbles, such as on 21 of 753 trading days in crude oil, and some influence of index funds on food prices in 2008. Most found that fundamentals explained prices. Radetzki and Wårell side with the majority, noting that commodities with no exchange trading rose just as strongly. Blas and Farchy cite burlap, hides and tallow. Traders speculate too: Cargill made over $1 billion in 2008-09 shorting oil and freight.

  • Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 158-170
  • Tilton & Guzmán (2016), Mineral Economics and Policy · pdf pp. 123-124
  • Blas & Farchy (2021), The World for Sale · pdf pp. 234-235, 242

4.2 A corner turns the delivery promise into a trap

A corner works through delivery. At expiry a short must deliver acceptable material or buy the contract back. If one party controls most of the deliverable stock and holds a large long position, shorts must buy back from that party at whatever price it demands. The tell-tale is an explosive backwardation in the expiring month, which no arbitrage can cap. Pirrong notes that corners distort the basis and harm hedgers; writing in 2014, he cites credible reports of squeezes in cocoa, coffee, copper and oil in the previous three years alone.

Blas and Farchy describe the aluminium squeeze of 1988. Manny Weiss of Marc Rich + Co, already assured of metal through tolling deals with smelters, bought heavily on the LME. At its peak his position exceeded all the inventory left in LME warehouses. Aluminium for immediate delivery reached $4,290 a tonne, more than $1,000 above three-month metal. Japanese holders then sold stocks to break the squeeze, but Marc Rich had already sold out.

Attempts often fail, because high prices draw out hidden stocks and deter buying. In 1987 John Deuss's Transworld Oil bought 41 of the 42 Brent cargoes for January delivery. Shell and others joined forces against him, prices fell, and he lost around $600 million. In 1991-92 Marc Rich's zinc traders and two producers held more than 90% of LME zinc stocks. The LME then let shorts defer delivery for a fixed fee, capping the squeeze; when one partner began selling, the price fell by more than a quarter in two months, margin calls drained the firm's cash and the trade lost $172 million.

  • Pirrong (2014), The Economics of Commodity Trading Firms · pdf pp. 14, 17
  • Blas & Farchy (2021), The World for Sale · pdf pp. 80-82, 111-113, 119-121, 241
  • Morgan (1979), Merchants of Grain · pdf pp. 453-463

4.3 Hunt silver and Sumitomo copper show the two faces of manipulation

Radetzki and Wårell cite two episodes against exchange prices, Hunt silver in 1979 and Sumitomo copper in 1996. They differed in kind.

The Hunt silver affair was a classic attempted corner. Morgan describes Bunker Hunt as a born commodity speculator who, unlike most futures traders, took delivery, hoarded bullion and tried to gain control of the company running the largest US silver mine. By the end of that year, the CFTC later found, they and an allied group owned over half the deliverable silver in COMEX depositories, and their March 1980 futures equalled 122% of those stocks. Silver rose from about $9 an ounce to near $50 in January 1980. The CBOT imposed emergency position limits in October 1979 and COMEX on 7 January 1980, and the price slid. On 27 March 1980, Silver Thursday, the Hunts missed a margin call of about $100 million and silver fell to $10.80. A New York jury later found them liable for conspiring to corner the market.

Sumitomo was a rogue trader. Yasuo Hamanaka, the Japanese trading house's chief copper trader, ran unauthorised positions for nearly a decade, according to Pirrong, costing his employers more than $2 billion. Blas and Farchy report that the scandal led regulators from sixteen countries to meet in Tokyo in 1997. Their conclusion was that in physical delivery markets with finite supply, information about positions and stocks is the key tool for keeping markets orderly.

Both episodes ended because fundamentals reasserted themselves. Blas and Farchy argue that by the 2000s most markets were too large to corner for long. Squeezes now tend to be local and short-lived, as when a trader nicknamed Chocfinger bought nearly all available cocoa stocks in 2010.

4.4 The 2022 LME nickel crisis: a squeeze in a market with a surplus

Nickel shows that a squeeze depends on deliverable stock, not the global balance. The LME contract is for high-purity Class 1 metal, but most nickel now comes from Indonesia as nickel pig iron, ferronickel and intermediates that cannot be delivered against it. The exchange price rests on a narrow slice of the market.

By early 2022 that slice was thin. Tsingshan, a large Chinese stainless steel and nickel producer, held a short position of around 150,000 tonnes, according to Bloomberg, largely a hedge against its growing output of undeliverable material. Russia's invasion of Ukraine raised fears for Russian Class 1 supplies, and in the early hours of 8 March the price passed $100,000 a tonne, more than double the previous close. Shorts faced margin calls they could not meet. The LME suspended nickel trading for eight days and cancelled all trades done on 8 March, damaging trust in the contract. In 2025 the Financial Conduct Authority fined the exchange £9.2 million for weak controls, including switching off its automatic price limits during the surge.

The crisis came in a market in surplus, with exchange stocks low and falling: the LME's US warehouses held 1,296 tonnes of nickel at the end of 2021 and just 6 tonnes a year later. The International Nickel Study Group estimates the world nickel market had a surplus of 98,500 tonnes in 2022, rising in each later year. Yet the LME cash price averaged $25,815 a tonne in 2022, up from $18,476 in 2021, and the March 2022 monthly average of $33,924 is still the highest of the past decade.

Radetzki and Wårell warn that a clearing house is not an ironclad guarantee: when prices move very fast, margin calls may not keep pace and default becomes possible. A short hedger that cannot deliver can be squeezed like any speculator.

See it in the table

Oil Crude oilCu CopperAl AluminiumZn ZincNi NickelSt SteelAg SilverCf CoffeeCc Cocoa

Check your understanding

Per Iwarson's decomposition, what supplied almost half of the commodity index return over 1970-2005?

Futures need only margin, so the rest of the money earns Treasury bill interest, about 7% of the 15% total.

What is the clearest market signal that a futures contract is being squeezed?

Shorts who cannot find deliverable material must buy back their positions, driving the nearby price far above later months, as in aluminium in 1988.

Why could the LME nickel price spike in 2022 despite a global surplus?

Most new supply was pig iron, ferronickel or intermediates. With little deliverable metal, short holders could be squeezed.
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