Extreme price events are far and away the greatest source of external risk facing oil and gas producers and other energy-dependent companies. Frequency and severity of such events has been increasing dramatically since about 2005/2006 causing ocasionally severe pain for many industry participants.
Case in point was the 70% oil price collapse through 2014 and 2015, from over $100 to below $30 per barrel. In the aftermath of this decline, U.S. mining industry – which includes oil and gas producers – reported losses of $227 billion, wiping out eight previous years’ worth of profits as the following chart shows:
This unfortunate event revealed that, in spite of frequently reported claims that industry participants and their bankers have become more sophisticated in the arts of risk management, most firms need to improve their risk management skill – and with some urgency.
But there’s good news. Firms can master the uncertainty inherent in price fluctuations and capture value from large-scale price events thanks to the simple fact that such events tend to unfold over time as trends. To capture value from pirce trends industry participants can use systematic trend following strategies which help us time when to hedge and when to maintain commodity price exposure.
Systematic trend following has proven effective since at least the 1970s and if used porficiently is far more effective and less costly than the complex structured products offered by myriad financial services providers and bankers.
The latest oil price swing
In barely two months’ time, oil prices collapsed by nearly 40% from their October 2018 peak. Using a set of trend-following strategies developed through my I-System model I’ve been able to navigate the event quite well as the following chart illustrates:
With the price correction unfolding, I-System strategies gradually reversed from long to short exposure, on average at $60.66/bbl on WTI and $69.04 on Brent and generated significant profits through 31 December 2018, as the following table details:
Commodity price hedging and enterprise profitability
In any commodity related industry, price is the pivotal factor determining profitability. Nearly 90% of managers in such firms regard commodity risk management as a key source of competitive advantage. Many of them need to revise their risk management practices and pursue more effective solutions.
At Altana Wealth we’ve formulated a competitively priced service offering that should meaningfully improve oil and gas, mining, and other commodity related businesses improve their risk management performance and develop price risk management with full transparency as an integral part of their core business operations. The following 12-minute presentation explains our philosophy, technology and track record:
For more information please visit Altana Wealth or drop me a comment below this blogpost.
Alex Krainer is a hedge fund manager and commodity trader based in Monaco. He’s publsihed the book “Mastering Uncertainty in Commodities Trading”