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, Hedging, Oil market, Risk management, Trading, Trend following

Groupthink in commodity price forecasting, its disastrous consequences and how to master price uncertainty

  • In financial and commodity markets, large-scale price events are not predictable. Even so, most market professionals rely on forecasts most heavily in making forward-looking decisions.
  • At times, this has disastrous consequences (see below)
  • Large-scale price events are far and away the greatest source of external risk for commodity-related businesses. Their severity and frequency has been on the increase in recent years.
  • An alternative approach to mastering uncertainty is to explore systematic trend-following strategies which, if used appropriately can turn price risk into a source of profit and hard to match competitive advantage

 

According to the latest Reuters survey, over one thousand energy market professionals expect the oil price to average between $65 and $70 a barrel in the years 2019 through 2023. Only 3% of respondents thought that Brent Crude Oil might increase above $90/bbl next year. So, market experts do not expect any surprises and largely agree that oil price will remain where it is. This groupthink reminds me of a similar situation some 15 years ago. Continue reading

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Asset management, Commodity price, Commodity risk, Hedging, Market trends, Oil market, Risk management, Trading, Trend following, Uncategorized

How we navigated the oil price roller coaster

Extreme price events are far and away the greatest source of external risk facing oil and gas producers and other energy-dependent companies. Frequency and severity of such events has been increasing dramatically since about 2005/2006 causing ocasionally severe pain for many industry participants.

Case in point was the 70% oil price collapse through 2014 and 2015, from over $100 to below $30 per barrel. In the aftermath of this decline, U.S. mining industry – which includes oil and gas producers – reported losses of $227 billion, wiping out eight previous years’ worth of profits as the following chart shows: 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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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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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). Continue reading

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