The ACD Method

Maverick74 said:
King, in economics we learn that price is always set by the marginal supplier defined as the supplier with the highest marginal cost of production. Think of a line of people who are all selling the same product but who each have different marginal costs. In a competitive market like oil, price is determined by the market so each supplier sells at market price. But cost is unique to each firm hence the idea that firms compete on cost, not on price in a competitive market. So as price drops, the firm with the highest marginal cost of production drops off the supply chain. Each firm has a market price where they can no longer afford to supply to the market. The firm that is on the margin sets the price because their supply is the most sensitive to price. If demand increases so that buyers are willing to pay more to bring more supply into market, then higher cost producers can then enter the market again.
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gotcha great explanation......I keep reading these articles about how the Saudis are trying to starve out the shale players with the idea that their production costs are dirt cheap as compared to say oil sands.
 
kinggyppo said:
gotcha great explanation......I keep reading these articles about how the Saudis are trying to starve out the shale players with the idea that their production costs are dirt cheap as compared to say oil sands.
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Right, price is set by supply. When OPEC's cartel dominated the supply, they could set the price of oil by "witholding" supply from the market. OPEC no longer can do that so supply comes on and off the market based on the highest cost marginal supplier which currently are the shale players.
 
I guess I can't my head around the idea that this product which is a real physical product
can have such a huge range in a relatively short period of time. Also, regarding the article you posted with the price curves I am I correct that the conclusion is lower oil prices for longer.

"This analysis suggests that - this year’s futures market is implying that the 28% plus fall in crude prices we saw in the first 20 days of January 2016 - is here to stay – because it is reflected all the way out along the curve. This is unusual because the reverse is normally the case – as reflected in the January 2015 curves – where the impact of the price drop diminished further out along the curve – a trajectory implying that prices might recover sooner rather than later. "

https://rbnenergy.com/the-downward-spiral-why-the-recent-crude-price-collapse-was-unusually-severe
 
kinggyppo said:
I guess I can't my head around the idea that this product which is a real physical product
can have such a huge range in a relatively short period of time. Also, regarding the article you posted with the price curves I am I correct that the conclusion is lower oil prices for longer.

"This analysis suggests that - this year’s futures market is implying that the 28% plus fall in crude prices we saw in the first 20 days of January 2016 - is here to stay – because it is reflected all the way out along the curve. This is unusual because the reverse is normally the case – as reflected in the January 2015 curves – where the impact of the price drop diminished further out along the curve – a trajectory implying that prices might recover sooner rather than later. "

https://rbnenergy.com/the-downward-spiral-why-the-recent-crude-price-collapse-was-unusually-severe
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Must be that cold Chicago air.....:)

A contango market is a mechanism that is trying to allocate supply in the most efficient manner possible. It's saying that today we have ample supply in the market. Let's move that supply out into the future where we might need it. So to create an incentive to store today and sell out in time, the market offers a premium for price in time. Or put another way, it's punishing those who sell in the present where supply is ample by forcing steep discounts. A backwardated market is doing the opposite. It's attempting to move supply from the future into the present to meet short term demand. When there is a supply constraint in the short run, the market will punish those who choose to store by forcing deep discounts out in time and offering premium pricing in the present. So it's not predicting market conditions, it's "reacting" to market conditions. The forward curve is explaining the current and future economic consequences of the decision to store. It really represents the epitome of what markets are truly for and how the economics of storage allow for the most optimal allocation of a scarce resource over time.
 
ignl said:
Easy and nice visualizations, statistics, back testing etc.. Here is the blog to give you an idea how does it look like: https://quantstrattrader.wordpress.com/
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damn...I either need to enroll in a coding class or just keep plugging away manually in Excel and on a legal pad. I think I'm the only one in the <35 group that trades and doesn't code. Gonna keep on trying...the good thing about ACD, even us knuckle-draggers can use it ;)
 
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