“Prophesy is a good line of business, but it is full of risks.” Mark Twain
It has been quite some time since I have posted an article.
The end of the year is a good time to reflect on past prognostications. I do have a list of publicly made prognostications. Of course, my most famous prophecy was the collapse of the oil markets in 1998. I was noted in several publications including front page USA Today. Since then, given my move into the real world from consulting world, my prophecies have been privy to the companies at which I’ve worked. However, you can find some public appearances at conferences where my prognostication skills can be bench marked to reality, I have dug up two from the past – one in 2011 and another while I was running my consultancy in 2015. Both, coincidentally, were at a Platts conference. I seem to do quite well at Platts conferences – perhaps I should be presenting more often there. Last, but not least, the latest news of auto manufacturers layoffs and cutting models made me go back to one of my previous blogs I posted.
The last public statement was made at the Platts Refinery Conference back in 2015. Right after that, I was implementing PMA at EDF Trading. At the conference, I was not given much attention as many of my ideas did no support the on-going trend and sentiment. In addition, I hadn’t spent a lot of time back in the refinery industry – but to be honest, its really not as complicated as power – for me it was easy to pick back up where I left. I rebuilt supply/demand models for each commodity. Reviewed and traced each demand and supply sector and examine key inflection points. I also followed up with respective experts/leaders in each product and had wonderful conversations with them. An expert with passion can’t stop talking :)! Please click on this link for the 2015 Platts Refinery Conference Presentation. I started my presentation noting how all the experts in the industry over the past decades have gotten major trends wrong and I wasn’t excluding myself (e.g. lighter crude slate – peak oil etc…). Many in the rooms did not like to hear this. However, if you ever get a consultant/expert to not review and face the facts of the past and admit their errors – run – run as fast as you can. An over confident consultant/expert can cost you a lot more than their fee. I discussed the current landscape with all the new oil and gas production and how ethane will need to find a new home. Currently ethane exports are almost at my 2024 foretasted export level! Also noted was the possible Naphtha issue and the two chemical feedstock would inevitably collide in the market. All of it came true, and the extent was even more than the tempered forecast I presented. I am a realist in the sense there is no reward to forecasting way above consensus – just being away from consensus is enough to get the point. I had an inclination that the situation could be much more dire than I presented, but I was already going against the grain so I tempered the expectations in the presentation. Creating scenarios also allowed the visuals of the direction of the market – note the high case.
Going even further back is a presentation I gave at Platts Coal Conference in 2011. I was in a similar situation where I had to relay a bad message to the room – and once again, many did not want to hear it. To view the presentation click on the following link – Platts Coal Refining Conference in March 2011. I noted my calculations of coal retirements made when I was Managing Director Strategic Planning for AEP – which was available in the public documents in one of the AEP Analysts meetings presentation. Essentially I was telling the audience that almost 50% of their demand might go away and that exporting would not solve their financial situations. Of course, no one in the coal conference wanted to heed my warning. The KOL etf had already dropped from highs of 50 in the year to 30’s in October 2011. I heard from some that this David person had no idea what he was talking about – because I was a power guy not a coal guy. Hmmm… when most of your demand is from the power sector shouldn’t that be the person you should be listening to? Anyways, the KOL etf is now 12 and we have seen some major bankruptcies in the industry. Export coal is up in volumes but just not even close to drop of volumes from US coal generation. The surprising reflection to note is how well the rail sector has done – perhaps replacing coal with oil and continued Chinese imports – but at some point that will likely end, too.
The latest news of auto manufactures laying off and cutting models made me think of an article I posted back in Feb 2015 which I reviewed the BP Energy Outlook. If only the auto guys took heed to my warnings – “…eventually with the falling prices and the improved efficiency improvement the auto manufacturer can produce an SUV with mass appeal and size that can go 0 to 60 in few seconds yet offer 25-40 mpg. Auto manufacturers who ignore this trend will be left in the dust as was seen last time SUV sales outsold compact vehicles. The move to this larger and faster car will swallow the small vehicles leading to overall growth in oil demand while maintaining the CAFE standards.” US total petroleum demand almost re-hit its monthly peak demand set in August 2005. Overall US petroleum demand has been in an upward projection since bottoming after the financial crisis.
There are many out there denying the ability of human beings to predict/understand the future. Books like Undoing Project by Micheal Lewis and the conclusions that Israeli psychologists Daniel Kahneman and Amos Tversky demonstrated that humans have a breakdown in their psyche creating poor decisions and inefficiencies in the market. They did not examined learned/experienced forecasters and also did not reach out to successful prognosticators. Much of their tests involve normal sample people, not experienced and trained-to-forecast individuals. We are also seeing the rise of AI and neural networks to take the human psyche out of the equation for decision making. However, it is the human that can relate to the human that is making decisions, even if the human is using AI. So far, I have yet to see an AI be able to go beyond short term analysis given its learning sample is always based on the past and the multiple forward inputs still require some creativity and art for which only an experienced person can create. I good benchmark for when AI is ready is when AI starts making art work so profound. At that point, I would say human prognosticators could likely be looking for another career, but until then – For my fellow aspiring prognosticators I leave you with these tips in order to be a better forecaster.
- One. Get a real job in the real industry and eventually in the planning and strategy group. Being a consultant your entire career leaves out the feedback loop of reality and you end up in this strange world of advice giving and not knowing how it really matters to the company and the multiple lives you could impact. This is also a note to companies hiring consultants – get one that has been in the industry in a position of planning/forecasting. They will understand your position best and know the bigger picture of what an outlook/position could mean to you and your company.
- Two. Have a fundamental foundation – examine as deeply as you can the drivers of supply and demand e.g. what are the economics parameters that drive more supply? When and how much does demand respond to price? What alternatives are there? etc.. The devil is in the details – get your hands dirty and get into the details. This is where IF you have passion, it will shine. IF you want to be the best, this is where sacrifices are made. Work longer – sleep and dream the problems – let nothing get in your way – if you really want to understand the market your forecasting. If you don’t, I promise you someone else will, and you won’t be getting it right consistently. Forget all those that say you must sleep so much and rest so much – I believe, when your in the midst of an issue, you must engross yourself and get your rest and leisure later. Nothing worthwhile that can be claimed as a great achievement comes without sacrifices. My first professional boss at Purvin & Gertz, Ken Miller, taught me about having passion for your work. His life was his work. He would carry the largest suitcase full of reading materials everyday. I have never stopped reading as much as I can because of him. He passed away this year, and may he rest in peace – but, knowing Ken, his rest would be reviewing refinery economics. Everyone should have such a boss with so much passion. There is so much that I owe him for showing me the way.
- Three. Be humble – know that you don’t know everything nor do you have to. In the mid 2000’s, I knew gas couldn’t just rise to the teens without something in between. Did I know it was shale at the time? No. But, I did know the principle of greed and human ingenuity. My premise to pull the prices down from the every growing forward curve came from the underlying thought of greed and human ingenuity, and I used LNG as my placeholder. In my calculations, at the very most, prices would be around $6-7/mmbtu. In the end, we see the development of shale was the ultimate greed and human ingenuity mechanism pulling gas prices back down even farther than I foresaw at that time. However, my premise was still right. It was not ever growing as the forward curve/market thought, and I didn’t have to know everything to save the company billions of dollars from jumping into more coal assets and not buying distress gas assets that later sold for multiple times on the dollar. It is so important to reach an understanding at some point in your career that no matter how much modeling and research is done, the world will unfold not even close to many experts predictions. With that humbleness you will open your mind and begin to, more accurately, prognosticate. You will realize and be more open to multiple outcome probabilities. Having ranges of outcomes does not make you weak, but makes you cognizant of the multiple dependencies that are out of your control e.g. weather. However, you will still need to have a base forecast to discuss where things are likely headed as long as all the dependencies likely head your direction.
Over the years, I have come to the realization that humble, but passionate, consultants are the best consultants, as they have been weathered and understand some of the unpredictable nature of the past and very much willing to put in the effort required to maintain expert status. They are confident enough to change their forecast before it is too late and also be brave enough to forecast against the trend.
May you have a prosperous 2019 – and stay thirsty to knowledge!
David K. Bellman
Your most humble, super passionate, and grateful but very lucky prognosticator of the energy market!
