Category Archives: Energy crisis

Commodity price, Commodity risk, Energy crisis, Hedging, Market psychology, Market trends, Oil market, Risk management, Trading, Trend following

Six Principles To Adopting Best Practices In Commodity Price Hedging

  • This week Sinopec disclosed the latest hedging mishap, losing $690 million amid last year’s oil price collapse.
  • Unless price risk management is organized as an integral part of core business operations, it can devolve into eratic and risky game of speculation that can cause massive damage.
  • The six simple but important guiding principles could help commodity firms create a world class risk management process and turn price risk into a source of value and competitive advantage.

This week Sinopec disclosed that it had incurred $690 million in losses in the fourth quarter of 2018. The losses were attributed to Unipec’s oil hedging bets. Unipec clearly took the wrong directional exposure to oil prices in the period when they staged a sharp, 40% collapse (October-December 2018). This much is understandable. However, such losses did not need to happen – I maintained heavy exposure to oil prices over the same period and not only avoided heavy losses but actually generated significant profits by simply adhering to a systematic trend-following model.

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Commodity price, Commodity risk, Economics, Energy crisis, Hedging, Inflation, Market research, Market trends, Oil market, Politics, Risk management, Trading

The coming oil price shock: could the crisis in Venezuela trigger an energy crisis?

Measured by historical standards, the price of oil has been extremely volatile in recent years. From over $114 per barrel in the summer of 2014 it collapsed more than 75% in only 18 months’ time. Then it tripled to $86/bbl in October 2018, only to drop by 40% to $52/bbl two months later. The question is, why is the oil price so very volatile? Is the market foreshadowing greater disruptions in the future? A closer look into oil supply and demand fundamentals suggests that a great crisis could be in the making – possibly with alarming repercussions.

The looming oil shortage

In 2012 a report produced by the UK Ministry of Defence predicted that oil prices would rise significantly out to 2040, and by “significantly,” they meant to $500 per barrel. From today’s perspective, this may seem farfetched. However, we should not dismiss UKMOD’s warning lightly. This could turn out to be the most important development facing humanity for decades to come. Continue reading →

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Commodity price, Commodity risk, Economics, Energy crisis, Hedging, Inflation, Oil market, Policy, Social development

Is an epic energy crunch in the making?

Last year I published a report with the (justifiably) bombastic title, “$500 per barrel: could oil price rise tenfold?” One of my central claims was that producing oil requires investment of real capital including materials, equipment and highly skilled labor, and that, “as more and more resources are required to generate the same amount of liquid fuels, energy production is becoming ever more expensive to society in real terms.” Thus, as it becomes more expensive in real terms (as the deteriorating EROEI figures indicate), the fact that energy has recently become cheaper in nominal (dollar) terms can only be a temporary abberation. EROEI stands for energy return on energy invested; in the early 1900s, we obtained 100 barrels euqivalent of oil per barrel invested (EROEI of 100 to 1); today we are at about 15 to 1 globally and at 11 to 1 in the USA. Continue reading →

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Commodity price, Economics, Energy crisis, Hedging, Market research, Oil market, Trading

Saudis to unveil the big secret? Not likely.

Over at OilPrice.com Nick Cunningham wrote that Saudi Arabia might finally reveal one of its closest kept secrets as they prepare to sell some 5% of its oil monopoly, Saudi Aramco, to the public. The Saudis and their Wall Street bankers expect Aramco to be valued at $2 to $3 trillion, which would generate north of $100 billion for the Saudis and massive underwriting fees for Wall Street Banks.

Since both the Saudis and Wall Street hope for the highest possible valuation for Aramco, we should not expect that they’ll “unveil” anything less than the rosiest plausible figure for their oil reserves. Continue reading →

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Complexity, Energy crisis, Policy, Psychology, Social development, Truth

Dear Leonardo, …about that 97% consensus…

Yesterday I saw a brief speech by Leonardo di Caprio imploring people to vote – not for the candidate who ignores science. He was talking about the scientific consensus on global warming and mentioned that 97% of all scientists agree that global warming climate change is a man-made phenomenon. This 97% consensus figure is so compelling, it is only fair to explore where it came from.

Where “97% consensus” comes from

One Margaret Zimmerman conducted an opinion survey in 2008. The “survey” consisted of a two-question online questionnaire sent to 10,257 “earth scientists” (?), of whom 3,146 responded. Continue reading →

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Commodity price, Energy crisis, Hedging, Market research, Market trends, Oil market, Trend following

5/5: $500 oil and how to manage the looming uncertainty and risk

Let us recap what we covered in parts 1, 2, 3 and 4 of this report. In spite of the low price of oil (just below $50 at the time of this writing) and predominantly bearish market sentiment, the “big picture” suggests that we are facing a grave energy predicament. Petroleum producing countries, especially members of OPEC, have been vastly overstating their oil reserves. Production of oil from conventional sources is in an irreversible decline. Over the next 15 years, the EIA projected that production will fall over 40% short of demand. New drilling technologies, and this includes fracking, are unlikely to impact this shortfall in a meaningful way.  These conditions have led the UK’s Ministry of Defence to predict in 2012 that oil price could rise to as high as $500 per barrel over the next three decades, causing crises of unforeseeable proportions. For the oil market participants, the trillion dollar question is how to cope with the looming uncertainty and risks. Continue reading →

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Economics, Energy crisis, Eurasia, Policy, Social development

Eurasian integration and the future of humanity

Developed world has come to a fork in the road. One of the paths leads in the direction of general military conflagration as the empire aggressively seeks to assert its dominance,  bludgeoning every independent-leaning nation into submission. The other path leads toward peaceful economic integation, growth, cooperation and trade across the old continent. Western political elites, working on behalf of corporate interests seem to be doing their utmost to lead us into another World War. Meanwhile those independent-leaning nations are building bridges of cooperation and trade. A recent article by F. William Engdahl provides an excellent take on how that path is being forged. This could be one of the defining stories of humanity’s future. Continue reading →

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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, but ultimately, this information was 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). Continue reading →

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Commodity price, Energy crisis, Market research, Oil market

3/5: Revisiting the peak oil hypothesis

As we discussed in part 1 and part 2 of this series, the world is facing a dire energy predicament; world oil reserves are fast dwindling and new extraction technologies won’t be able to reverse global production declines. By all accounts, it appears that we are past the point of peak oil and today we take another look at the peak oil hypothesis. One of the key thoughts in this report is that, as oil production becomes more expensive in real terms, it must also become more expensive in nominal, or dollar terms. That it has recently become cheaper in dollar terms can only be a temporary aberration. Continue reading →

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Commodity price, Energy crisis, Market research, Oil market

2/5 Oil production and the evolution of drilling technologies

Technology is another element comprising the happy talk about the world’s inehxhaustibly abundant oil supplies. As with Saudi Arabia (and other nations’) reserves, the reality is quite different from what is commonly presented. The argument is that oil reserves calculus changed in the last decades as drilling technologies iproved. That, in part, is how the mushrooming oil reserves numbers are justified even in absence of large new oil field discoveries. Unfortunately, experience hasn’t borne out this optimism and the idea that drilling technologies may have turned Saudi Arabia’s 110 billion barrels of proven reserves into 790 billion barrels is unrealistic, to put it politely. Continue reading →

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