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.

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Wednesday, August 18, 2010

Have I been wrong all this time?

To some extent I got carried away with all this kububrum thing and while the markets traded according to my scenario up to now I think it is not yet time to call it the end of the world. Some positive developments are taking place right now and pose a risk to risk off trade... and this is taking place in China. I mentioned already that it feels like Asia is gaining more weight in driving not only commodities markets, but equities and FX as well. Earlier I wrote a post on Shanghai composite and how it respects horizontal lines. Well, we're sitting right under it at the moment:


And if we break higher through 100d moving average at 2700 we will confirm head and shoulders pattern that will target channel resistance and 3000 and possibly higher towards 3 100 - head and shoulders minimum target...

I however believe that if we fail through 100d moving average that would send the markets much lower as
we tried to break through this level 5! times.

If bullish scenario is to materialise this will push oil towards the channel resistance at 83-85 and possibly higher if momentum is good:


US markets are likely to extend higher on Chinese news and main risk to the bearish scenario is the break of 1130-1135 which will confirm head and shoulders in S&P as well which will target 1250 as minimum:


This latter is still in making so I would not bet on this yet, but Shanghai and oil look like as possibility... I think we will see it as early as tomorrow and I feel it is a a little bit dangerous to stay short going into tomorrow.

Have a good evening...
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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.
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