Normal backwardation in crude oil markets

James Hamilton at Econbrowser had an interesting series of posts (here and here) on determining the effect of naive commodity index funds in crude oil and other commodity markets. His hypothesis was that:

the more futures contracts the funds want to hold, the more risk the counterparties who short the contract are exposed to. According to the model, the futures price must be bid high enough to compensate the short side for absorbing the risk. This compensation comes in the form of an expected profit to the short side of the futures contract.

I pointed out in the comments that this sounded very familiar to me:

...isn't this an attempt to prove a version of Keynes's theory of normal backwardation? Here is Keynes: "If supply and demand are balanced, the spot price must exceed the forward price by the amount which the producer is ready to sacrifice in order to hedge himself, ie. to avoid the risk of price fluctuations during his productions period."

Keynes wrote that speculators would require a premium if they were to bear the risk of price movements. In a way, it seems you are substituting Keynes's hedgers with a more modern sort of naive indexer from whom speculators demand an extra return.

Unfortunately Hamilton did not find the data to back up his hypothesis. Too bad, it is a very elegant theory.

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