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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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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Asset management, Commodity price, Commodity risk, Economics, Hedging, Market trends, Risk management, Trading, Trend following

How trend following can help industry hedgers: the Palladium edition

Palladium price has more than doubled since the early 2016 making the white metal more valuable than gold for the first time since 2002. Its impressive performance attracted much attention from the financial press, which published numerous articles and analyses about the palladium market. If you diligently read the analyses, you may learn that automotive industry accounts for some 75% of demand for palladium, that its global production is as little as about 200 metric tons per year (vs. about 3,000 tons for gold), that only two countries (Russia and South Africa) produce more than three quarters of its global supply, and that the demand for palladium is expected to continue to grow. Presumably that implies that palladium price should remain high and possibly continue to rise. Continue reading

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

How we navigated the oil price roller coaster

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: Continue reading

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

Trading COMEX Copper with I-System technology

The price of Copper has been trending significantly higher since the start of 2016. However, this trend has not been easy to trade using traditional trend following strategies.

HG_PriceCurveFm2015_2018_Framed

This last event (D) was quite painful for most – if not all – trend followers, as the following chart illustrates:  Continue reading

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