The energy trading floor can be a crucible where billions of dollars change hands based on split-second decisions. In this pressure-cooker environment, the interplay between analysts, who analyze and interpret fundamental data, and traders, who take positions wholly or partly based on these interpretations, can make or break fortunes.
Kurush Mistry, with over a decade of experience in oil analysis, offers unique insights into this dynamic. His career, spanning both traditional oil markets and renewable fuels, provides a valuable perspective on the inherent tensions in the analyst-trader relationship and the ways of productively managing the relationship to achieve the best outcomes for the team, in an increasingly volatile industry.
The two roles are purposefully different, with the analyst tasked with being thoughtful, thorough, objective and creative, and the trader tasked with finding profitable opportunities and managing risk, and thus possibly looking for quick, actionable insights. With the right set-up and communication though, these roles can be complementary and work well together as a team.
Understanding Bias in Energy Trading
Energy trading has undergone significant changes in the past decade. Kurush Mistry notes, “Now a lot of the data is more broadly available to any market participant that’s willing to pay for it.” This democratization of information has altered the traditional dynamics between analysts and traders, requiring both to adapt to a new normal where competitive advantage lies in interpretation rather than mere access to data.
Bias in energy trading can manifest in various forms, from overconfidence to the tendency to seek out information that confirms preexisting beliefs. Mistry observes, “Everyone has their inherent biases, and especially when one has a position on, it’s only natural and human to be biased in favor of one’s positions. The degree to which traders can fight that bias varies significantly from trader to trader. And an analyst has to try their best to be objective, data-driven and not let biases, their own or the traders’, creep into forecasts”
Additionally, Mistry emphasizes the importance of collaboration: “The ideal trader-analyst relationship is where you’re working as a team. There is a constant iterative process whereby analysis or models are presented to the traders, they poke holes in it , compare it to other analyses they have seen, data points they have heard from their industry contacts, and give constructive feedback. That feedback is incorporated into the models to improve their accuracy, and the process of back and forth should be a continuous one. For e.g., a trader might say, ‘No, actually this assumption of yours may not be valid because I’ve spoken to someone at a refiner and they say that’s not what happens in practice.’”
One of the main challenges Kurush Mistry identifies is the need for analysts to stand their ground while maintaining respect for traders. He states, “As an analyst, the traders are your clients, so you have to be respectful of that. But at the same time, you have to stand your ground, and emphasize the objective data and research that leads to your conclusions. Because if you don’t, then you’re just a cheerleader, and that doesn’t end well. Constructive, objective feedback is essential to the process, but natural, bias-based thoughts might need to be calmly countered with facts.”
Mistry sees the integration of renewable fuels as an example of both analysts and traders needing to constantly learn and upgrade their models. He notes, “In 2022, understanding the growing significance of renewable fuels in the energy equation, I broadened my expertise to include sustainable aviation fuel, renewable diesel, ethanol, biodiesel, and U.S. soybean oil.”
The Role of Alternative Data
Alternative data has also become increasingly important in understanding an ever-changing world, and in bridging bias. According to Kurush Mistry, “There’s been a lot more alternative data, partly because of the availability of new technology — satellites, ship tracking, big data, and the ability of companies or providers to process it.” This influx of new data sources provides opportunities for more objective analysis.
Mistry’s experience during the COVID-19 pandemic illustrates the importance of adaptability and collaboration. He recalls, “Take jet fuel demand. Typically we would’ve looked at jet fuel demand as based on economic growth, travel trends, et cetera. But when it went down to such low levels, how do we best figure out if and when it’s coming back? That’s when we started looking at flight data and schedules to help point us in the right direction. And now, it can be used on a continuous basis, to fine-tune models.”
In a more complex world with a lot more data availability, Kurush Mistry’s perspective highlights the importance of teamwork, open communication, and adaptability in fostering productive analyst-trader relationships. As he puts it, success in this field now requires both analysts and traders to “dig deeper and try and find more creative or interesting things to explore.”
In an industry characterized by constant change and inherent biases, the ability to build strong, collaborative relationships between analysts and traders will continue to be a key determinant of success in energy trading. Mistry’s insights underscore the evolving nature of these dynamics and the critical role they play in navigating the complex world of energy markets.