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, 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, Risk management, Trend following

Lessons in trend following: how we traded sugar

Sugar prices have soared on the CSCE (Coffee, Sugar and Cocoa exchange) from just over $0.10 per pound in August 2015 to over $0.23 at present – a fairly sharp jump by any standard, particularly after several years of continuously falling prices. I trade sugar using our trend-following model and to channel my inner Donald Trump – we’ve done tremendously well, generating a respectable grosss annualized return of nearly 10% per annum over a 5-year period. Now, the main reason I find this remarkable is that I know next to nothing about the fundamental economics of the sugar market. I know it goes into biscuits and beverages, that it comes from sugar cane or sugar beets, but that’s about it. Continue reading

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