Lessons learnt from Commodities trading

I have been participating in the NYMEX Commodities challenge 2008.
The standing as of March 12,2008 were posted here.

I have learnt that trading futures contracts of commodities is not for the faint of heart. The markets are so volatile and there are so many things that can affect them. Now, during the period of the competition (Feb 13-March 14), the markets have gone only one way. that is way up. Oil moved from mid 90s to 110 today. Gas is up big time to from 8.6 to 10$.

I just wanted to list what i can think can affect Futures of Crude Oil prices.

  • Value of USD ($$$):
    • Commodities are $ denominated items. As the price of $ changes, there is a direct impact on the commodity. So, during the competition and for a couple of years now, the $ depreciated against major currencies such as the Euro, Pound. This means the oil producers earn less in their local currency terms. So, they demand more for a barrel of oil. This will push the prices of the commodities higher.
  • Interest rates in US
    • As interest rates in US are cut, its a sign that the economy is slowing down. The Fed cuts the rates to jump start the economy. This normally has the effect of raising crude oil prices. Now, if the market has certain expectations of a rate cut and those are not met due to a lower than expected cut, prices may move in the opposite direction.
  • Supply-demand
    • Laws of supply demand do impact everything that is traded on this planet and commodities are no exceptions to this rule. As demand drops, so do prices. As supplies increase, for constant demand, prices will drop. However, during speculative times, supply demand tends to be ignored. Watch for the U.S. Department of Energy data that shows the level of crude stockpiles. A reduction or draw is considered bullish for crude oil prices while an increase in supplies is bearish.
  • State of US Economy and Equities markets
    • If the US economy is slowing down and the equity markets are turning bearish, money from several financial insitutions, hedge funds, tends to flow into commodities. This can lead to speculative positions and the prices may move irrationally against the other factors, such as supply demand.
  • OPEC Production
    • OPEC controls a major portion of crude oil production levels. They have their vested interests and like to see crude oil prices stay above or at a certain level (say above 80$). OPEC meets every few months to decide its course of action and whether they will increase production, keep it constant or decrease it ( if demand is less or they want to raise prices).
  • Political factors
    • This one can throw a curve ball at you on any day. Any remote event in an oil producing country can significantly impact crude oil prices. Like the last time, Chavez caught a cold and Oil prices went up. Kidding 🙂 However, events like fears of war ( Venezuela – Columbia) , attack on pipelines in Iraq or Nigeria tend to raise prices. You need to read news at sources such as Bloomberg

About Adib Motiwala

Portfolio Manager at Motiwala Capital LLC
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