Commodity price, Economics, Energy crisis, Hedging, Market psychology, Oil market, Uncategorized

4/5: Sources and quality of oil market information

This posting is part 4 in the 5-part series on the future energy crisis we are likely facing. Here are parts one, two, and three. My research to try and establish facts about oil supply and demand led to many dead-ends where you must take the information at face value and hope that it is true. For example, we’ve all heard (again) about tanker-fulls of unsold crude oil floating around the world. Ultimately, this information is based on hearsay. For example, Bloomberg reported how oil companies are seeking supertankers to store 20 million barrels of crude oil [i] (that sounds like a lot, but it represents only a few hours’ worth of global demand).

Bloomberg got this information from a Greek shipping company – essentially, some dude just said so! But this bit of information was picked up by numerous analysts and treated categorically as a fact to explain the oil supply glut. This reminded me of Thomas Friedman’s story about how he filed temperature reports for Beirut as a correspondent for the New York Times [ii]:

I estimated what the temperature was, often by ad hoc polling… Gathering the weather report basically involved my shouting down the hall or across the room: ‘Hey, Ahmed, how does it feel out there today?’ And Ahmed or Sonia or Daoud would shout back, ‘Ya’ani, it feels hot.’ … So I would write, ‘High 90 degrees.’

Friedman’s reports were then duly included in UPI worldwide correspondence from Beirut. Once published in reputable newspapers as the New York Times, Washington Post and others, they appeared as facts in black-on-white, but as Friedman confesses, the figures were merely his own lazy guesstimates. I suspect that much of the information that gets into compelling-sounding oil market analyses comes from surveys conducted with similar rigour. Once they are cited by respected institutions however, they gain the validity of hard facts with which persuasive narratives can be contrived giving us the sense that we understand what’s going on in the world and why. I suspect that often we don’t.

Once you start reading news reports with a critical eye, you find shoddy reporting depressingly often. Here’s another jewel from Bloomberg which, alongside Wall Street Journal was particularly prolific in publishing bearish news on oil. In April of 2015, they published a story by one Grant Smith, titled “Saudi Arabia Adds Half a Bakken to Oil Market in One Month.” In the article, Smith wrote how “Saudi Arabia boosted crude production to the highest in three decades in March,” adding 658,800 barrels per day to an average of 10,294 million barrels per day. To my mind, those were some very precise figures obtained from a very non-transparent oil producing nation. The article went on to cite more amazingly detailed figures, rounded to the nearest 100 barrels. It cited four such figures and all four ended with the figure 800 [658,800; 346,800; 811,800; 318,800].

Paint me excessively suspicious, but I do find this odd because in spite of such surprising precision, the article also presented a glaring contradiction. See if you can spot it: in the opening paragraphs, Smith wrote: “The kingdom boosted daily crude output by 658,800 barrels in March to an average of 10.294 million…” A few paragraphs on, in the very same article he said: “Saudi output rose by 346,800 barrels a day in March to 10.01 million a day…

For headline readers, the story’s implications are clear and unambiguous: the Saudis are flexing their oil producing muscles, the oil glut is going to get even glutter, and the price can go nowhere but down. As a matter of fact, the press – Bloomberg, the Wall Street Journal, and OilPrice.com particularly – were rather saturated with such stories throughout the 2014-2016 oil price slump, contributing to the bearish narrative and market participants’ collective perception of the reality in the markets. But for a more rigorous analyst, such reports posed more questions than answers.

All too often, narratives tend to be skewed by an invisible bias which determines which “facts” are included in a story and what significance they are given. During the recent oil price collapse, the need to explain facts on the ground created the bias that led the majority of analysts to pick facts with bearish implications to come up with a compelling narrative explaining the collapse. Bullish “facts,” like the declining oil output simply got ignored for the occasion. Reading over many such articles and research reports I’ve identified at least three constituencies producing energy reports with their inherent biases looking at energy markets:

  1. Energy industry and their investment bankers. Their reports tend to be upbeat-to-exuberant: there’s plenty of oil, production is going through the roof, fracking technologies are improving by the day and production will keep growing to infinity.
  2. Government agencies. Their reports tend to be cautiously upbeat, both about the available oil reserves and the ability of new technologies to develop new projects and resources feasibly.
  3. Academic institutions, particularly UK-based ones. Their reports tend to be positively alarmist and frequently evoke global climate change, the need to move away from fossil fuels and shift to alternative energy sources.

Each of these groups produce professional and credible-looking reports with neatly tabulated figures and interesting charts, but often leading to very different conclusions. Between the lines, it is not difficult to discern the root of each group’s bias. Oil industry and their bankers want to attract investment capital. This obviously includes Saudi Aramco and the army of analysts on their payrolls. Government agencies want to favor dominant industries and avoid stirring alarm among their constituents. And academic institutions – ever devoted to pursuing unvarnished truth – at times put out reports that reach pre-formulated conclusions requested by groups that fund their research.

Peak oil from military organizations’ viewpoint

There is however, one group that doesn’t have an overriding financial stake in the energy markets, and that is the military. I think we can get closer to the truth by researching about how various military organizations look at energy-related issues. In the last few years I have come across three different reports – one by the German Army’s Bundeswehr Transformation Centre [iii], one by the U.S. Army Engineer Research and Development Center [iv], and one by UK’s Ministry of Defence [v].

Each of the three reports considers the peak oil hypothesis with utmost seriousness and treats the notion that we have run out of cheap, easily extractable oil as a hard fact with grave consequences for the world economy, societies and global security. While the U.S. Army report doesn’t mention “peak oil” as such, it is based on the notion that “The days of inexpensive, convenient, abundant energy sources are quickly drawing to a close… ” and discusses the likely consequences and contingencies for the U.S. Army.

The German Army’s report similarly affirms that the world is facing peak oil and future scarcity of crude oil. It notes that all of Germany’s key oil suppliers are past peak production and discusses the likely consequences in matter-of-fact but rather dismal terms. For example, the report sees peak oil as a global problem that could lead to breakdown of supply chains and global trade. It notes that high energy prices could disrupt the financial markets, leading ultimately to a collapse of economies, mass unemployment, infrastructure collapse, famine and a total system collapse. Is this too dramatic? Perhaps, but if we consider that in terms of calories, about 50 times more economic output is produced by fuels than by labor[vi] [21], it is clear that we are facing very real risks of major economic and social disruptions.

UK Ministry of Defence’s report is also in agreement about peak oil, stating that “the imminent passing of the point of peak ‘easy oil’ will mean that hydrocarbon-based energy prices will rise significantly out to 2040.” MoD’s report projects that oil prices are likely to reach $500 per barrel. Consequences of the energy crunch might result in food shortages and a scramble for commodities and resources.

While this report was released in 2012, we have meanwhile seen another indication of the seriousness with which peak oil is regarded by the UK establishment. Namely, UK Government’s Department of Energy and Climate Change (DECC), Bank of England and Ministry of Defence among others, have in secrecy conducted an ongoing peak oil workshop since at least 2009. In 2010, The Observer has invoked the Freedom of Information Act to obtain the policy documents related to these workshops, but the DECC declined to release them, stating in a letter dated 31 July 2010 that these meetings are “ongoing” and “high profile” in nature. High profile indeed.

Last year, none other than the Governor of the Bank of England, Mark Carney was in Riyadh to inquire about the future of oil and oil prices [vii]. When the governor of one of the world’s most powerful central banks takes such personal interest in an issue, we might do well to discard any happy talk about great oil abundance and assume the situation is grim.

 

Alex Krainer is an author and hedge fund manager based in Monaco. Recently he has published the book “Mastering Uncertainty in Commodities Trading“.

Notes:

[i] Nightingale, Alaric and Naomi Christie, “Oil Trades Storing Millions of Barrels at Sea on Slump.” – Bloomberg, 9 January 2015. – http://www.bloomberg.com/news/articles/2015-01-09/oil-traders-seen-storing-millions-of-barrels-at-sea-on-slump-1 – On a side note, it appears that Bloomberg has been particularly prolific in publishing articles with bearish implications for the oil market

[ii] Friedman, Thomas. “The Lexus and the Olive Tree.” New York, Anchor Books, 2000.

[iii] Bundeswehr Transformation Centre – Future Analysis Branch: “Armed forces, capabilities and technologies in the 21st century: environmental dimensions of security” – November 2010 – www.energybulletin.net/sites/default/files/Peak%20Oil_Study%20EN.pdf (112 pages).

[iv] Energy Trends and Their Implications for U.S. Army Installations” – U.S. Army Engineer Research and Development Center (ERDC), U.S. Army Corps of Engineers, September 2005 – unfortunately, this report is no longer available. An article about the report – “U.S. Army: Peak Oil and the Army’s Future” by Adam Fenderson is available at http://www.resilience.org/stories/2006-03-12/us-army-peak-oil-and-armys-future

[v] “Strategic Trends Programme: Regional Survey – South Asia out to 2040,” UK Ministry of Defence – Development, Concepts and Doctrine Centre (DCDC), October 2012. – DCDC is MoDs think tank within the Defence Academy site at Shrivenham. – The report utilised the input of a range of government agencies and departments, including the MoD’s Strategy Unit, the Defence Science and Technology Laboratory, the Cabinet Office, and the Foreign Office – as well as two private institutions, Standard Chartered Bank and Now & Next. Decc is notably missing from the list of contributors. A copy of the report is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/49954/20121129_dcdc_gst_regions_sasia.pdf

[vi] Lees, Andrew “In Search of Energy” – The Gathering Storm (2010).

[vii] Durden, Tyler. “What Saudi Arabia Told the Bank of England About Why Oil Crashed and Where it is Headed Next.” – ZeroHedge, 16 March 2015 – the article relates prepared remarks by Dr. Ibrahim Al-Muhanna, Advisor to the Minister of Petroleum and Mineral Resources of Saudi Arabia at the Institute of International Finance Spring Membership meeting.

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One thought on “4/5: Sources and quality of oil market information

  1. igor says:

    There is 45MJ/kg energy in one liter of oil.
    If you will need more, to extract 1l, then the 45, we shall have a trouble. Until then is the price not important.

    Like

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