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, 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, 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, Hedging, Oil market, Risk management, Trading, Trend following

Groupthink in commodity price forecasting, its disastrous consequences and how to master price uncertainty

  • In financial and commodity markets, large-scale price events are not predictable. Even so, most market professionals rely on forecasts most heavily in making forward-looking decisions.
  • At times, this has disastrous consequences (see below)
  • Large-scale price events are far and away the greatest source of external risk for commodity-related businesses. Their severity and frequency has been on the increase in recent years.
  • An alternative approach to mastering uncertainty is to explore systematic trend-following strategies which, if used appropriately can turn price risk into a source of profit and hard to match competitive advantage

 

According to the latest Reuters survey, over one thousand energy market professionals expect the oil price to average between $65 and $70 a barrel in the years 2019 through 2023. Only 3% of respondents thought that Brent Crude Oil might increase above $90/bbl next year. So, market experts do not expect any surprises and largely agree that oil price will remain where it is. This groupthink reminds me of a similar situation some 15 years ago. 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.

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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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Commodity price, Hedging, Market trends, Trading, Trend following

On effective trend following strategies

A question frequently arises among trend followers on the nature of effective trading strategies. The old school of thought holds that strategies should be simple, ultra robust and effective across markets and time frames. I happen to disagree so here I share a hard-won piece of knowledge that should help settle this question. Continue reading

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