Asset management, Behavioral finance, Commodity price, Commodity risk, Energy crisis, Hedging, Market research, Market trends, Oil market, Risk management, Trading, Trend following

In October 2019 I predicted the current oil price collapse. How I knew? Here’s how:

In January last year, Reuters polled 1,000 oil market experts who basically agreed that oil would remain anchored in the $65-$70/bbl range through 2023. Only 3% of these experts thought that oil might rise to $90/bbl or more in 2020. I posted my analysis at this link: Market Fundamentals and Forecasting Groupthink. Later that year I published my own analysis, “Next Move in Oil Prices: $5-$10 Lower,” concluding that, …oil price will likely see another leg down… with Brent falling toward high $40s and WTI toward low $40s.

I publish forecasts only very seldom, as I rarely feel confident enough about any forecast not to heed that voice in my head, “… on the other hand…” But there are times when the picture is clear enough that it pushes your confidence threshold to the level of reasonable certitude. Another bit of certitude I have: longer-term we’ll live into an oil price shock that could take oil prices into uncharted territory.

But even with this I pay little heed to forecasts, particularly expert groupthink. Even if the forecast is correct, to actually profit from it you need to get its timing right as well. The price might get from where you are to where you predict it should go, but its trajectory won’t likely be a straight line. So between A and B you’ll find yourself on most days full of doubt, reassessing and second-guessing your analysis. In the process you might act in discord with your own judgment resulting in losses rather than gains.

Indeed, if there’s one thing I am sure about after 20+ years in this game, it is this: investment performance is not so much about mastering the markets as it is about mastering yourself. Your performance depends not on what you think but what you do: the decisions you make and execute over time. Here emotion, distraction and loss-aversion psychology will sway you off course more often than you like to admit.

Warren Buffett rightly said that what’s needed is a sound intellectual framework for making decisions and a way to keep emotions from corroding that framework. Getting the forecast right is only a start but the process is an everyday balancing act: every day is an opportunity to make the right or the wrong decision. Getting it right day after day can be an overwhelming burden for even the best professionals in the game. Getting the emotions out of the equation is a big long story all in itself. Please stay tuned…

 

Alex Krainer has been actively trading commodities for over twenty years. He currently works as systematic trading advisor for London and Monaco based Altana Wealth Ltd., an independent $300 hedge fund firm. In the past he advised corporate clients on managing commodity price exposure risk. In 2015 he published the book “Mastering Uncertainty in Commodities Trading“ rated 5-stars on Amazon (ratings are few but genuine, from readers).

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