“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!
Oil Market Outlook Change – Too Low Demand Expectations
BP released their 2015 Energy Outlook. As noted by their Chief Economist this is not to address prices or near term events. However, price, in the end, is the meat of a discussion for an energy outlook as price and outlook for supply and demand are intertwined.
The outlook by itself is useful to gather facts and trends. The real value for someone like me comes from the change in the outlook. In theory, the process of formulating these outlooks should not change. Therefore a change in outlooks signifies a change in market place expectations. The best slide in reviewing the change to show the dramatic shift in expectations is slide 13 in the presentation. The latest forecast for 2035 shows a very small call in OPEC <5 million barrels/day see figure below.
If we go back into time and look at the very same slide in 2011, we see the call for OPEC in 2030 (even less demand requirement given 20 year gap vs. 22 year gap in current forecast) amounts to over 10 million b/d. This is a dramatic swing see figure below for 2011 BP Energy Outlook.
IF one believed in the process and the forecast output, the shift between the two forecasts would dramatically drop the expectations of crude oil price. As a longtime forecaster of the crude oil markets, the call on OPEC is key component on price forecast. This piece of the puzzle represented the additional swing from OPEC who, in theory, purposely holds spare capacity to sustain a reasonable market level. With the need of OPEC being diminished, the overall pressure for oil prices to move upwards is limited.
Obviously, BP cannot state or present a price view given its role in the market place, but if their trade floor was made well aware of this trend and believed it, they would have made a good call over the last year. However, the long-term aspect of this trend does not bode well for BP as a company. In fact, the overall energy sector would not benefit from this including renewable energy and refining industry.
The demand side also shows some major shift in expectations. In 2011, the expectation for China oil growth was nearly 10 million b/d more than the base year (2010). Now expectations have fallen to around 5 million b/d from the base year (2013). The interesting outcome of this is whether BP flowed back the price response from the expectations of lower prices per the lower call in OPEC to the response of China demand. To lose 5 million b/d would require a much lower expectations of GDP outlook, in addition a very inelastic response to the price of oil is needed to maintain such a drop in demand. OECD demand decline is nearly the same – yet the price expectations from 2011 to 2015 must have dropped.
From my experience, the demand piece is typically the flawed portion of the forecast after coming off a major supply shift. Supply can be well understood in terms of cost of development and potential technology improvement curves. It is my belief that the demand outlook presented is too low. The expectations of this come from both the price feedback of consumers and the fact that the demand side has included a significant portion of efficiency improvements over the past few years.
Efficiency improvements do not lead to reduce consumption of a commodity without a continued price increase. This is supported by the Khazzoom-Brookes postulate and Jevons Paradox. My caveat to the theory is to add the price component. Improving efficiency of a commodity leads to more use of that product without a corresponding price increase. I also expect this with electricity as we make up for the large efficiency improvement by having more devices and more appliance than we had a decade ago, even though, a single appliance may be 50% more efficient.
I do not expect our human desires to have a car that is faster and bigger to be different by region or time. Corporate Average Fleet Efficiency (CAFE) improvements have and will result in near-term gasoline demand improvement in the US, but 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. This move to this larger and faster car will swallow the small vehicles leading to overall growth in oil demand while maintaining the CAFE standards.
This mass appeal will also eventually migrate to other areas of the world. The ability to stop this rebound is the corresponding price. In the oil markets that seems to be muted as expectations of price is likely between $50 to $100/bbl and not rising over $100/bbl for the next decade or so. Power markets may thwart the rebound given the trend in transmission and distribution cost, but this will be highly dependent on the region. Obviously adding a carbon tax would increase the cost curtailing the demand.
Please consider All Energy Consulting for your energy consulting needs. We offer a unique and fresh perspective on the energy markets to help you succeed
Your Fundamental Supply / Demand Energy Analyst,
David
David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
[email protected]
@AECDKB
Oil Market Doomsayer & OPEC Bashers –Not Putting the Money Up
Over the past week, there were so many pundits noting the poor decision by OPEC and that the market will continue to spiral down. As I worked on refreshing my oil price forecast given this market change, the remarkable difference is that there is not much difference in the forward curve. Yes we have a near term capitulation, but extending further into the curve the drop becomes much less. By 2020 the difference can be attributed to the rising dollar valuation.
No doubt, the forward markets are poor predictors of actual results, but they do represent a financial view now. The numerous pessimistic pundits must not be persuasive enough to those with money in hand. As I tried to relay in my previous writing on the oil markets, this is a timing issue. There is little doubt oil demand will grow at some point as population and improvements in standard of living are expected to grow (unless someone believes in Armageddon).
The current situation was inevitable as demand growth was not meeting the supply growth as noted in my previous article. However, in the end, as all fundamental analysts will point out, supply and demand always meet. The price will take care of this convergence.
Oil production will change its path. Oil & Gas companies will take the time to be more efficient and less wasteful versus focusing on the next barrel to be produced. This mitigates some of the decline expectations, but all it will take is a slowing of investment at a shale play to see the production profile change within a year or two.
Oil demand will also change its path. The consumer will consider oil prices to be low given their conditioning of $100/bbl markets. I expect SUV sales to rise as they have done in the past when oil prices dip. The developing nation is also getting a break and they will take on more demand.
I know many of us are trained now to be immediately responsive given our access to Twitter, Facebook, and other always connected social media devices but this is not how the energy markets operate. Aberrations are inevitable. Energy planners need to consider all the aberration potential from large discoveries to political unrest. In the long run, as a planner, these events eventually produce a net belief of the likely outcome of the supply/demand balance with price playing interference when one gets too overwhelming over another.
In this instance, I think the forward curve is quite rational. The big issues to weigh are:
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Is there another political unrest around the corner to take a few million b/d off the market (e.g. ISIS, please not another war)? (bullish)
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Is there enough cost savings in the supply chain to keep the production flowing in the US and Canada at or below current prices? (potentially bearish)
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When and how long will it take for demand to rebound given a consumer saving of 20-30%? (bullish)
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Will oil subsidies given to many producing countries citizens end? (bearish)
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How much and how long can efficiency improvements keep down oil demand – Khazzoom Brookes Postulate? Postulate shows when you improve efficiency of a commodity you end up using it more. (bullish)
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Will OPEC cave in and try to maintain prices? (depends)
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Any real carbon reducing initiatives? (bullish – Canadians eh’ – tar sands processing is pretty carbon intensive and expensive)
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Advancement of US shale capabilities into other countries? (bearish)
We will all have our own opinions on each of these topics and the probabilities of each. As you can see there are still many bullish variables despite all the bearish pundits. Based on the financial markets, they are still bullish on oil and it is not all hot air given their money is at risk.
All Energy Consulting can work with you and your team to create scenarios and play out the market outcomes. We offer unique sets of skills which incorporates the extended reach of energy from oil to electricity. In the end a BTU is a BTU – some are more functional than others.
Your more than hot air Energy Analyst,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
Natural Gas Revolution?
Natural gas revolution, perhaps, is real, but it will take more to make it a real revolution. There is no doubt that shale development has made a major leap in gas supplies. However, energy is just a means to an end. In order to make this a real revolution, we need to see ingenuity in using natural gas. With the largest spread between natural gas and oil we should start seeing advancements in gas to liquids. I have done much in this area and have failed to come across something transforming in this field.
You can have all the energy you need and more, but if you don’t use it in a productive fashion you will end up like a third world producer of energy for others to exploit. As a domestic policy focusing on finding and developing energy is valid, but in the end, it is how you plan to use it. We need energy because it brings value to society by enhancing our way of life from keeping us warm in the winter to allowing us to read at night.
So much debate is focused on the industry on how many jobs it can create. Who really cares? Why would one want an economy built on the means not the ends? The less we can require of our means the greater the value of the ends become. The notion of a grand green economy to the massive employment of natural gas or coal is quite unproductive for the long run. Jobs in a sector which only enables you the option to live better cannot deliver much value as in the sector that actually implements better living. Natural gas has an opportunity for electrification, chemicals, petroleum products, goods manufacturing, heating, etc… Focus is needed on how we use natural gas.
Currently natural gas is still being flared around the world including the US. In Iraq alone they are flaring quite bit – http://blogs.platts.com/2013/06/17/iraq-flare/?sf429145=1. For a country who is lacking consistent electricity it would make sense to build up the infrastructure to transport and use the gas for electrification. Ingenuity in developing a means to manage stranded gas and/or increasing the value of that gas is lacking. This will be a revolution as soon as we are able to reduce and/or eliminate flaring of natural gas. The fear is we found a way to find more natural gas, but in the end flare it off in search of the higher value liquids product.
A revolution requires more than a one-sided story. Perhaps the low price signal is the beginning in terms of the market place action. However, there is much needed on the domestic policy front. We need to stop focusing on policies aimed at boosting production and creating an economy from developing energy and start to focus on an economy on using the energy in a productive fashion. Then, and only then, will it be considered a revolution.
As you ponder the path of energy please do consider All Energy Consulting as potential partner. We do technology valuation to forecasting commodities.
Your Energy Consultant,
614-356-0484
