How Satellites Could Destroy Profits for Commodity Traders

Until bitcoin, it was commodity futures that traders loved.

Take iron ore as an example. In 2017, iron ore dipped as low as US$54.24 and rose as high as US$94.91 a tonne.

iron ore price

Source: Bloomberg

Or what about oil? The WTI crude oil has traded as low as US$43.78 and as high as US$58.95 a barrel.

crude oil price

Source: Bloomberg

Iron ore and oil futures

But if you think this is volatile, you should check out the iron ore and oil futures markets. This is where traders and hedgers bet prices will go one way or another.

For example, if companies announce more shipments and an increase in production, prices are likely to go down. Traders believe the market will be saturated with the commodity and try to short the commodity before it falls.

In the opposite scenario, when production is halted unexpectedly and shipments are infrequent, traders might buy, thinking the price will rise temporarily.

This frequent guessing can and does, cause some problems within the market. Many times, assets are bid up far too high on speculation and the market experiences a short, sharp correction.

But what if commodity traders could increase the accuracy of their bets?

Is information really a good thing?

Imagine if traders could see commodities dug out of the ground, driven to the port and shipped to customers. Such information would give commodity traders far more conviction when betting on future prices.

Well, it seems commodity traders just could get that advantage, thanks to satellites in the sky. Bloomberg picks up the story:

Companies like Ursa Space Systems Inc. and Orbital Insight Inc. are using satellites to try to shed light on tightly held secrets in the commodity trading world, from coal mine productivity to crude oil storage. While doubts remain around the accuracy and consistency of the data, there could come a day when traders can track supply and demand of raw materials, the operations of producers and consumers and even the output of entire economies in near-real time.

satellite launches rate

Source: Bloomberg

But will more information really help commodity traders?

Well, it depends upon how wide spread these satellite feeds are. If it’s as easy as logging onto a website or paying a few bucks for a live stream, I suspect commodity trading will get a whole lot less sexy.

Traders are in the market to trade. If certainty increases, volatility decreases, leading to far lower profits for commodity traders.

Cheers,

Härje Ronngard,

Junior Analyst, Markets & Money

PS: Commodities prices came back in 2016 and rallied hard in 2017.  Could they continue to rally heading into 2018?

Our resource analyst, Jason Stevenson thinks so. Jason is one of the sharpest minds when it comes to the resource sector. And he’s written a report about his top 10 mining stocks trading on the ASX right now.


Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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