SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
observer84
Topic Author
Posts: 195
Joined: December 29th, 2010, 7:51 am

Why invest into physical commodity assets when vola is down?

May 5th, 2014, 1:58 am

Bloomberg article from May 2. bloomberg shale revolutionThe article talks about commodity merchants acquiring huge amounts of physical assets in the petroleum industry (from storage over transportation to production). This keeps me wondering why they do that at the moment? Are they expecting volatility to rise? For me, storage (and most other physical assets) derives it's value from volatility (or volatility of calender spreads). For instance, volatility has been very low in natural gas in the last couple of years.. Some possible reasons in the article are given: Banks want to leave the physical business and thus, there is an "abundance" of physical assets available to buy at a discount. The article also refers to some "aribtrage" opportunities arising from the record production volumes from shale which I do not understand completely.Would love to hear some ideas / thoughts.Bestobs
Last edited by observer84 on May 4th, 2014, 10:00 pm, edited 1 time in total.
 
User avatar
farmer
Posts: 13478
Joined: December 16th, 2002, 7:09 am

Why invest into physical commodity assets when vola is down?

May 5th, 2014, 4:02 pm

Maybe the volatility in calendar spreads is down because the storage providers are making money? Bond yields are pretty low. So people do not need to make a lot of money in storage to justify capacity. What is their competition for capital? Who else is paying any returns?
 
User avatar
acastaldo
Posts: 1416
Joined: October 11th, 2002, 11:24 pm

Why invest into physical commodity assets when vola is down?

May 5th, 2014, 4:23 pm

Is there contango or backwardation in oil futures right now?
 
User avatar
tagoma
Posts: 18363
Joined: February 21st, 2010, 12:58 pm

Why invest into physical commodity assets when vola is down?

May 5th, 2014, 4:32 pm

QuoteOriginally posted by: observer84 This keeps me wondering why they do not at the moment? Do not what, pls?
Last edited by tagoma on May 4th, 2014, 10:00 pm, edited 1 time in total.
 
User avatar
acastaldo
Posts: 1416
Joined: October 11th, 2002, 11:24 pm

Why invest into physical commodity assets when vola is down?

May 5th, 2014, 5:43 pm

Why they do not buy spot crude at 99.56, store it until December 2014 and deliver it against a short Dec future at 94.50
 
User avatar
farmer
Posts: 13478
Joined: December 16th, 2002, 7:09 am

Why invest into physical commodity assets when vola is down?

May 5th, 2014, 5:50 pm

QuoteOriginally posted by: acastaldoWhy they do not buy spot crude at 99.56, store it until December 2014 and deliver it against a short Dec future at 94.50Maybe they are trying to get storage built by December?
 
User avatar
observer84
Topic Author
Posts: 195
Joined: December 29th, 2010, 7:51 am

Why invest into physical commodity assets when vola is down?

May 5th, 2014, 10:19 pm

@tagomaSorry, I meant "This keeps me wondering why they do that at the moment?" (corrected it at my original post now).Oil is in backwardation, gas (henry-hub) actually has several humbs in the term-structure. Although compared to historical calender spreads those seem to be rather low.QuoteMaybe the volatility in calendar spreads is down because the storage providers are making money?Ok, that might be the case. Still, it does not explain why people keep on investing into those assets if volatility is already down. Maybe, as you suggested, the alternatives are too scarce at the moment.Bestobs
Last edited by observer84 on May 5th, 2014, 10:00 pm, edited 1 time in total.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On