Guest post from Paul Somerfield:
In commodity trading, it’s important to take two kinds of technology into account. The first is technology that can affect the underlying price of the commodity and the second is disruptive digital technology that can change the way commodities are traded.
Technology can be a game changer for commodity prices
Take oil. A decade ago we were all being told that we’d reached peak oil, and that declining stocks would mean an astronomically high oil price in the future.
Yet, at the time of writing, Brent crude is trading at $61.33 a barrel, way below its peak price. So what happened? Technology happened, that’s what. Advances in exploration and drilling technology meant that oil previously locked up in shale could be mined. An enormous amount of new inventory was able to exploited. So much for peak oil and a crude price nudging $200. Right now, the OPEC producers are trying to get the price so low that the US shale industry calls it a day because it’s not worth the expense of fracking and horizontal drilling to extract the oil.
As a commodities trader, you have to be up to date with new technological developments in the segments you are trading and watch constantly for signs of change in the outlook for prices.
Commodity trading is largely a futures game and some of the largest players in the market are companies such as large agribusinesses that are hedging against possible bad weather or other factors that might affect crops. But this is a complex area, where oil companies are buying farmland as a hedge against the possible discovery of biofuels – energy and other companies are constantly looking ahead when managing their own commodity portfolios.
Gold mining may be affected by mobile phone recycling
Another example of technology affecting commodity prices is the ability to extract and recycle gold that has been used on circuit boards, particularly in mobile phones. Last year a new process was developed which uses a simple chemical to recover the gold used in mobiles. And with roughly 300 tons of gold going into electronics each year, this is a significant development with two main impacts. First the price of second hand mobiles is likely to rise and secondly there may be an impact on the gold price as less new gold is needed by industry.
New technology also disrupting the old commodity trading model
The financial crisis affected commodities trading because some of the major banks that were large players in the market, scaled back their activities. This led to less liquidity in some areas, although commodity houses and hedge funds have subsequently scaled up their commodity trading operations. However, despite big data, in the commodities market, it has been very difficult to collect enough aggregate data to manage risks – and that problem is greatly magnified for the individual trader. Although trading platforms have revolutionized commodities trades, there’s a new game-changer heading the way of this market as far as risk management, pricing and contracts are concerned.
The future is block chain?
Bitcoin, the cryptocurrency that is itself traded widely, uses an underlying technology known as blockchain. Instead of parties to a transaction keeping their own separate ledgers, all transactions are recorded in a shared, distributed ledger that is effectively maintained by everyone in the blockchain network. Transactions are timestamped and are secure.
Advanced commodity trading houses are now looking at combining blockchain technology with Artificial Intelligence (AI) and the information transmission capability of the Internet of Things. Using sensors and meters, it will become possible to track a commodity such as oil from the drilling platform, to the pipeline, to the onshore terminal, to the refinery and finally to the petrol station, logging its value, ownership, relevant transactions and other data at every point in the journey.
This means that the commodity can be traded and priced at any point. Contracts and transactions relating to the commodity can be recorded using the same blockchain technology. Futurology? No, this is happening now, so traders need to be aware of how it will change commodity trading, and ready to take advantage of any opportunities that it may present.
Thanks to Paul Somerfield
The Deviant Investor