Report: Commodities Demystified – A Guide to Trading and the Global Supply Chain

Date of Source: 2016

Summary:
Commodities trading – supply of the basic staples that are converted into the food we eat, the industrial goods we use, and the energy that fuels our transport and heats and lights our lives – is one of the oldest forms of economic activity, yet it is also one of the most widely misunderstood. At no time has this been truer than in the last 20 years, with the emergence of a group of specialist commodities trading and logistics firms operating in a wide range of complex markets […] 

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Drilling For Value, Appendix B: Commodity Price Forecasts (or, why commodity price forecasts are mostly worthless)

Summary

  • Equity investments into upstream oil and gas companies are largely levered commodity price plays; long-term total returns barely offset the carry costs of taking a long position in oil futures.
  • There are multitudes of ways by which experts seek to forecast future commodities prices; most don’t work.
  • The failure of forecasting should not be surprising if the Efficient Market Hypothesis is even partly correct.
  • Even barring market efficiency, behavioral models provide ample reason for the widespread inaccuracy of forecasts.
  • The idea that commodities prices — including oil — follow a random walk is both overwhelmingly supported by evidence and practical.

Figure 1: Black Gold

Source: Andy Thomas. Black Gold

Evidence overwhelmingly supports the notion that investments into upstream oil and gas producers are basically levered commodity price plays. This, and the fact that commodities producers are price-takers, indicates that petroleum economics are overly levered to commodities prices. It should follow, therefore, that an ability to accurately predict petroleum prices could result in advantageous market timing — i.e. investments in the right petroleum producing assets during the right times in the cycle. As a result of this ostensible potential for riches, prognosticators have devised multitudes of ways to forecast oil prices. Unfortunately, most of these efforts fall short of useful — no known forecasting approach, not even futures strip prices, significantly outperforms the assumption that price evolutions are random walks using out-of-sample data. This failure is not surprising, however, if we are to believe even a watered-down form of the Efficient Market Hypothesis (EMH).

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Grading the Gurus

FORWARD REMARKS
I used to think of myself as contrarian, but after completing my most recent research project, “Grading the Gurus” (which I presented at the last MBIIM) , I now realize that I only appear to be a contrarian. I’ll spare you the discourse on how I came to that for now, but I’ll make sure to include it in my closing remarks.

For those who were unable to join us last Sunday, I thought I would summarize the presentation and the following discussion. Without further ado…

INTRODUCTION TO ‘THE PROBLEM’
Like my previous post says, “I have often wondered if it makes any sense to pay attention to investing gurus.” And there certainly are a lot of them. Most of which seem to promise you that they’ve found the “secret” to easy money, whether that be a method of valuing companies or assessing the market’s future direction. However, evidence suggests otherwise as it has been proven that 85% of mutual funds have underperformed “dumb” index funds over the last 40 years. This means that all those fancy folks that went to fancy schools and wear fancy neckties are not as smart as “passive” investors. Therein lies the problem…

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Tomorrow’s IPO of Jones Energy (ticker: JONE)

My coworker told me about an email his broker sent about tomorrow’s IPO on Jones Energy (ticker: JONE). Interested, I did some preliminary research, and here is my email to him almost verbatim:

A word of caution on this deal. The main reason you hold off for now is that you probably are not prepared to sift through the 250 page IPO filing over the next 24 hours. Also, I have no idea what each share is worth because they haven’t even disclosed how many shares are going into the float (i.e., outstanding shares available on the market). Also, they have the disclosed the following below their income statement:

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