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

Trend following and the impact of unforeseen events

“Yes, but how can your system know if XYZ happens and markets go haywire?” This is one of the two most frequently asked questions about systematic trading strategies I’ve used over the last 20 years. Most traders tend to rely on analyses of supply and demand fundamentals to form a judgment about future price changes.

My contention is that this simply does not work and I can make a strong case to back this up (see here, here or here). I can also offer evidence that my systematic approach does work (see here or here) even if I know nothing about the supply and demand economics of most markets I cover. This usually elicits the objection that my system can’t know if some XYZ event might happen tomorrow  (recently, XYZ tended to refer to Trump tweets), upsetting the markets and rendering my strategies ineffective. Recent experience afforded me an (almost) perfect answer to this question (plus another important issue related to trend following). Continue reading

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Asset management, Behavioral finance, Commodity price, Commodity risk, Expertise, Hedging, Market research, Market trends, Risk management, Stock market, Trading, Trend following

Do trend followers move markets? (they do).

A few months ago, when reviewing our trades on US Treasury futures, I was so delighted, I drafted a bragging article titled “How we knew yields would collapse?” summarizing the results of our trading. That performance was entirely generated by my I-System model, first built in 1999. I still find myself awestruck that this works… We generated profitable trades through both the bear and the bull market in bonds, literally without needing to know a single thing about the market fundamentals. The trades were strictly based on the knowledge framework built into the system more than 20 years ago (by the way, our strategies are still generating excellent signals in those same markets). Continue reading

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Commodity risk, Economics, Energy crisis, Market research, Oil market

The oil price shock: has it arrived?

Experts seldom expect surprises. In spite of the ever deepening economic and political uncertainties gripping most oil producing and oil consuming regions, most market experts surveyed last year predicted that oil price would fluctuate between $65 and $70 through 2023.

That forecast assumes that nothing unforeseen would happen over the next five years. Such an assumption, to put it politely,  is unjustified and the list of reasons is long and complex, and it can be neither ignored nor wished away. Over the recent months I’d written a handful of articles on the subject of the ‘coming oil price shock.’ Here are the last three: 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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Monaco, June 2019 – with Jarand Rystad

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, 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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Commodity price, Commodity risk, Economics, Energy crisis, Hedging, Inflation, Market research, Market trends, Oil market, Politics, Risk management, Trading

The coming oil price shock: could the crisis in Venezuela trigger an energy crisis?

Measured by historical standards, the price of oil has been extremely volatile in recent years. From over $114 per barrel in the summer of 2014 it collapsed more than 75% in only 18 months’ time. Then it tripled to $86/bbl in October 2018, only to drop by 40% to $52/bbl two months later. The question is, why is the oil price so very volatile? Is the market foreshadowing greater disruptions in the future? A closer look into oil supply and demand fundamentals suggests that a great crisis could be in the making – possibly with alarming repercussions.

The looming oil shortage

In 2012 a report produced by the UK Ministry of Defence predicted that oil prices would rise significantly out to 2040, and by “significantly,” they meant to $500 per barrel. From today’s perspective, this may seem farfetched. However, we should not dismiss UKMOD’s warning lightly. This could turn out to be the most important development facing humanity for decades to come. Continue reading

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