How Quantitative is Commodity Trading
Would appreciate it if anyone had any insight into how quantitative physical commodity trading particularly oil/nat gas has become? Is trading oil at a supermajor relatively more quantitatively focused than say a fundamental role at a MM hedge fund. Or is it still relatively more focused on relationships and understanding macroeconomics and geopolitics.
Physical oil trading is not about understanding macroeconomics or geopolitics or computer programming. It’s about optimizing assets, building a book of longs and shorts, participating in flows to gather intel and understand players in a market, and then SOME physical traders will put on speculative trades based on intel that they know or analytics that the desk produces. There is no edge to be had from studying politics (it obviously matters but no one can predict it better than anyone else) and no one except maybe the desk analyst is expected to program. Physical oil traders at hedge funds almost exclusively become discretionary paper traders, and I’ve not met many that know how to program either- they outsource that to analysts.
Based on your username, curious what sorts of quant work you do
I have worked a lot with physical and financial traders, but I've always done analytics for both systematic and fundamental trading.
A lot of it involves constructing data pipelines, using that data to model the producers, transporters, and end users of a commodity- both statistically and testing/integrating an understanding of how assets/other companies behave. And then using that representation to backtest how much people are willing to pay for things under certain conditions, predicting what those conditions will be in the future, and then comparing that to what the current price is to find any risk-reward favorable trading biases that traders express both financially or via physical assets.
But I wouldn't say that this is what people think of when they think of physical trading, and the traders themselves don't need to do any of this.
Thanks so much for the reply. What sort of processes would be involved in predicting those future conditions?
Each time period is a unique combination of events- whether that involves volumes, weather, accidents, outages, or differing logistical costs. And it could be that some combination of events in the future is being paired with a current market value that is not consistent with the risks of that event.
Im in a significantly different part of the energy/commodities space and couldn’t have said it myself. Game theory/market signaling is far more important than straight quant in phys
Do you mind mind if I DM you? FYU - I am a fundies analyst, covering a niche light ends product, but find myself wrestling with data for crude, gasoline, naphtha and petrochemicals (we are basically a two person team covering all these markets and the guy helping me is good with Excel, but that's about it). I'm curious to see what steps one needs to take/skills we need to learn in order to construct these data pipelines. Thanks :)
Sure
In layman terms, how does this translate to generating a trading opportunity in the oil market? I would understand checking the pipeline flows, weather, and storage data for natural gas to trade the basis.
It’s really economics 101. Find a price that allows the market to clear a desired quantity. This region is x number short oil, what price causes them to get x to fill that. This day needs y amount of power, which power plant running at a cost of z needs to turn on to meet that.
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