I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

Search This Blog

Tuesday, August 17, 2010

Forecasting extreme weather

Hurricane forecasting involves dynamic modelling of temperatures on the surface, see and air tracking of pressure levels and much more. One of the drawbacks of weather forecasting is that currently science does not have enough computer power and even formulas to model weather in 3D. From what I heard everything is simplified to 2D calculations and that puts a big question mark on reliability of data.

Right now I will offer a brief analysis of current hurricane season and my conclusion is, on contrary to everyone else, that this hurricane season in the US will be a non event... Hurricanes have big impact on energy markets in the US as they might disrupt oil and gas production in Gulf of Mexico as well as refinery operations on the coast. So, I think, in order to forecast weather, you should not look any further but at gas prices and refineries margins. Quick look at the charts says that market is not building any premium of hurricane disruption into the price:

1. Nymex gas had been very weak after breaking 4.55 level (see earlier posts on this) and I am not sure where the bottom is if we break $4.20...Moreover time spreads are not showing any change even though we are close to the peak of the season. Here is the front month graph:

2. Gasoline crack (for oct10) is the weakest since a while so there is no premium there as well:

Obviously there are many assumptions in my "research", but you rarely find a model without drawbacks. and I think the simpler the better... I honestly would bet on nonexisting hurricane season or at least the one with no disruption to energy operations in Gulf of Mexico.
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)