Shale Gas 2008
Bull to Bear and back...
Further proof that predictions are meaningless in this Bloomberg story on the yes, no, maybe saga of the Merrill Lynch (who owns them these days, we lost count) energy guru Francisco Blanch who gives forecasts that occassionally make people blanch.
Blanch changed his 2009 price forecast at least four times this year as the worst global slowdown since 2001 spreads. His most recent estimate that crude may fall to $25 came on Nov. 26. The Organization of Petroleum Exporting Countries’ 13 members meet in Oran, Algeria, tomorrow to try to stem crude’s decline.
“A shift of views from an analyst is a good thing,” said Pierre Andurand, chief investment officer at BlueGold Capital Management LLP, a London-based hedge fund that manages $1.1 billion. “It means he takes the change in economic conditions and the change in balances into account. We can’t say that for many of them.”
Well of course the more forecasts you make the higher the likelihood of at least one being correct. Blanch's claim to fame was his forecast of both $150 oil and a resultant crash. Whether that was due to erudition, luck or a gift for frequent incisive comments we don't know. We certainly agree that oil is near it's low, apologies now to Donald Trump who we mocked on 30 September when one of his ravings was for $20 oil. And we can see that oil could boomerang if the economy suddenly takes off. But the way this economy is going, even President Obama (how we love saying those words), who will have a massive psychological boost on markets, won't actually be walking on water to put everything back together again. Or maybe we're wrong, Bernie Madoff will find a few tens of billions of dollars in that suit he left at the cleaners and everything will be simultaneously dory and hunky. Who knows? Not us, but then we're not in the predicting business. And neither should anyone else. But people want to hear stories, and one of the faves has always been that the impossible (you can beat the market for example) is possible. In energy, just like most markets, people pay for this "inside" information. But what is it worth?
His $25 prediction may have received more weight than it deserved, said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts.
“Sure, if the Chinese economy gets really bad, we could go below $25,” she said. “It’s kind of like saying if the temperature drops, it will be cold outside.”
Blanch, who runs half-marathons and takes the subway to work, said the likelihood of $25 oil is less than one in three.
“The best you can do is sort of set out a number of alternatives and try to set out within your central forecast what are the risks around it and what are the alternatives,” he said. “Nobody has a crystal ball.”
Which sounds familiar from our home page About No Hot Air
We don’t have a crystal ball on what’s going to happen in energy. On the other hand, no one needs to cross our palm with silver.
Flattery will get you nowhere
Sorry to break the news but you aren't special. Many energy users think they are. They like to flatter themselves, and they will also pay people to flatter them. The flattery they seek is: you're special, your company is special, your energy spend is special. Our intervention will get you a better price and for this all we need is for you to give a modest (!) contribution to our charity.
Maybe that's why NHO doesn't make much money. We tell the truth: your gas and power price depends solely, completely and unutterably on drivers over which you do not, and never will, have any control over.
But energy consultants like to tell people different. You’re special, you can get something that other people can’t get. And people pay to hear it.
Flattery will not only get you nowhere. You'll end possibly worse off, at the absolute minimum if you measure time as money. Hiring a consultant or TPI involves not only paying a fee, but spending time. Time spent providing information, and paying others to analyse your own figures. Time spent discussing options with third parties instead of doing it yourself. And most of all time spent regretting your decision. Buyer's remorse on a fixed price energy contract will get you sooner or later. Why pay to constantly check if the decision was right.
Four days actually, but it provides a good example of why fixing long term prices shouldn't be considered.
It's been a cold old week in the UK, but it is December. Nothing terribly earth shattering, and physical demand was met with no problems whatsoever. Cold enough though to put day ahead gas, the price of which in theory reflects supply and demand up about 16% Monday thru Thursday.
The problem for those end users who fix one year gas prices via their own option or because their advisors don't tell them about index deals, is that prices for one year have gone up 15.8% in four days as well. During a time that oil basically ended up where it started and had a range of 7%.
No wonder end-users don't understand the market: Imagine going to an FD and saying that the one year gas deal from Monday ended up 15% higher simply because it got cold.
Why do people make a decision to set the price of gas in April or September on how cold it is today, or will be next week? Because that's exactly what one does fixing prices. A bad day on the markets, or a string of them in this case, simply pulls things up. People were selling, and even madder, others were buying, January gas at 115 earlier this year. We don't really know what January will be until it gets here. But why should it go up 15% this week, and drag everything else up with it?
Possibly because some suppliers are under presssure to lower domestic rates due to the big fall in prices. So if they game the market for the rest of the year, they can come back with 12% drops next month instead of 20% is our theory. Possibly wrong, but as good as any.
Value at risk. Your value.
Why do so many buyers of energy avoid index pricing and let others try and second guess the market for them? One reason is that energy consultants,the high end of theThird Party Intermediary market, don't often tell them about the alternative, or try to blind people with science: normally Nobel Prize winning, and as value destroying as the 45% lost on the FTSE this year. It depends on a few things, a not inconsequential item being the size of the fee, but as a general rule hiring a consultant means they have to out-perform an index by up to 15% to be worthwhile taking into the time and effort and potential grief and remorse and that fee.
It's like hiring a mutual fund to shadow the FT: why bother,when you can get a very low cost way of doing it by going through the bank.
The estimable Nassim Nicholas Taleb has been mentioned here before and although he hates all form of predictions, he surely will be again. An article in the FT he co-wrote reminds us of how portfolio theory promised every one riches: And where did that get us? Portfolio theory, derivatives and VAR: over the past ten years, if you had put $100 in the market every month, today you would have $0.
Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. Do not let him hide behind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel’s credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: “Thou shalt not follow a multitude to do evil.