Commodity price, Energy crisis, Market trends, Oil market

More bad news from Saudi Arabia

 

Over the years I’d highlighted the increasingly dubious status of Saudi Arabia as the world’s oil production powerhouse. This year we learned that their flagship oil field Ghawar produced much less than everyone knew, now courtesy of Bloomberg we find another disconcerting bit of information corroborating these doubts as the following chart illustrates:

SaudiCrudeStockPile

There can be little doubt that we are facing a grave and serious energy predicament going forward. Our economies and societies better begin preparing yesterday. Links to my research outlining the fundamental supply and demand conditions can be found here: Continue reading

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Asset management, Commodity price, Market trends, Risk management, Trading, Trend following

How we knew yields would collapse?

Here’s a question: how did we know to short US T-Notes starting in Q4 2017, then reverse and go long in November of 2018? Did we know interest rates would first rise, then collapse at the fastest rate in 50 years? Are we so brilliant as forecasters? Did we have insider information? The answer is, none of the above.

We did not know what would happen – but profited from events anyway. Here’s how: Continue reading

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

Failure of price forecasting: the unit of account conundrum

In addition to the better understood challenges of market analysis, like access to timely and accurate data, there is another – rather massive, but usually completely ignored – problem that renders forecasting largely an exercise in futility.

Over the years I’ve written quite a bit on the unreliable nature of price forecasts based on the analysis of market supply and demand . Most recently, in “Market fundamentals, forecasting and the groupthink effect,” I discussed the problem of data quality as well as the very real problem of groupthink among leading analysts, providing an example of a staggeringly wrong oil price forecast they produced. Some of the very same experts later produced this gem: Continue reading

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Commodity price, Commodity risk, Complexity, Economics, Expertise, Hedging, Market psychology, Market research, Market trends, Oil market, Risk management, Trend following

Market fundamentals, forecasting and the groupthink effect

Last month I had the privilege of meeting with Jaran Rystad of Rystad Energy to discuss strategic cooperation between our companies. On the occasion, he gave me a rather detailed presentation of his firm’s energy intelligence database. I must say, in my 20+ years trading in commodities markets this is by far the most impressive product of its kind I’ve ever seen. Even from the software engineering point of view, I was very impressed. For full disclosure, nobody asked nor encouraged me to write this. Much as you’d recommend a restaurant where you ate well or a doctor you respect, I wholeheartedly recommend Rystad Energy as a provider of energy market intelligence as a matter of giving credit where credit is due.

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With Jarand Rystad of Rystad Energy in Monaco – their oil market intelligence is impressive by any standard.

However, even with top notch data on economic supply and demand fundamentals, divining the future remains difficult and unlikely. John von Neumann rightly said that forecasting was “the most complex, interactive, and highly nonlinear problem that had ever been conceived of.” Continue reading

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Commodity price, Energy crisis, Hedging, Market trends, Oil market, Politics, Trading, Trend following, War and peace

The coming oil price shock 3: saber rattling in the persian gulf

Side note 1: as oil geopolitics tensions escalate I’ve decided to sequentially number my “coming oil price shock” articles. This is the 3rd one (the first one is here, and second one here.)
Side note 2: if oil price hedging is a headache, please view my presentation here (YouTube, 12 minutes).
  • Trump Administration put their credibility on the line by taking a hard line on Iranian oil exports, pledging to collapse them to zero.
  • Iranian officials matched the rhetoric by promising to close the Straits of Hormuz entirely to oil traffic. A third of world’s traded oil production transit through that choke-point.
  • Assurances of ramped-up oil production from Saudi Arabia and Opec appear as firm as a wet noodle.

 

U.S. taking a hard line on Iran oil exports

Over the Easter weekend we’ve seen an escalation of Trump Administration’s rhetoric toward Iran. On Monday, 22 April, State Secretary Pompeo issued an official statement pledging that after their expiry on May 2, the U.S. would not renew any of the waivers enabling Iran to export crude oil. Iran’s oil exports have already dwindled from 2.5 million barrels per day last April to around 1 million barrels, and the official U.S. policy is to bring Iranian oil exports to zero.

In taking the hard line against Iran, the Trump administration has put its credibility on  the line. Secretary Pompeo followed up the official announcement on twitter, stating that, “maximum pressure” means maximum pressure. Trump backed him up promising “full sanctions…”

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Commodity price, Commodity risk, Economics, Energy crisis, Hedging, Market research, Market trends, Oil market, Policy, Social development

The coming oil price shock: troubling news from Saudi Arabia

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Commodity price, Commodity risk, Energy crisis, Hedging, Market psychology, Market trends, Oil market, Risk management, Trading, Trend following

Six Principles To Adopting Best Practices In Commodity Price Hedging

  • This week Sinopec disclosed the latest hedging mishap, losing $690 million amid last year’s oil price collapse.
  • Unless price risk management is organized as an integral part of core business operations, it can devolve into eratic and risky game of speculation that can cause massive damage.
  • The six simple but important guiding principles could help commodity firms create a world class risk management process and turn price risk into a source of value and competitive advantage.

This week Sinopec disclosed that it had incurred $690 million in losses in the fourth quarter of 2018. The losses were attributed to Unipec’s oil hedging bets. Unipec clearly took the wrong directional exposure to oil prices in the period when they staged a sharp, 40% collapse (October-December 2018). This much is understandable. However, such losses did not need to happen – I maintained heavy exposure to oil prices over the same period and not only avoided heavy losses but actually generated significant profits by simply adhering to a systematic trend-following model.

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