How should commodity traders now think about geopolitical risk?

In 2009 political scientists Ian Bremmer and Preston Keat defined geopolitics as “the study of how geography, politics, strategy, and history combine to generate the rise and fall of great powers and wars among states.” Given its importance to the running of the modern global economy, nowhere is this more vividly observed than in the battle for energy resources and in particular oil.

A cursory look at a simple oil price chart reveals a series of bumps. Each of these can be pinpointed to wars and conflicts, whether it was the Iranian revolution or the first and second Gulf wars. More recently, Arab Spring related uprisings in Libya, Egypt and Syria as well as violence in Iraq and the Ukraine have resulted in escalating geopolitical tensions across many key energy production and transit countries.

read more

What is commodity risk?

Whether it is a farmer deciding what crop to plant for the next harvest, a manufacturer deciding whether now is the best time to purchase the commodities it needs, or an investor taking a position in coffee futures in anticipation of a drought in Brazil, all these decisions consists of dealing with the future.

And as it’s difficult to make predictions, especially about the future dealing with risk is essential.

Commodity market risk comes in many forms and can mean different things to different people.

read more

Top 8 mistakes in commodity buying and risk management

1) Limited understanding of commodity risk

Many companies are failing to quantify their risk exposure to commodity prices. They often rely on ambiguous assumptions about price volatility and how and when movements in commodity prices impact on their bottom line.

2) Monitoring and preparing for ‘black swan’ events

Only a small proportion of firms actively look to monitor emerging commodity price pressures and and put in place plans to address high impact low probability risks.

3) Inadequate commodity procurement performance measure

read more