Tuesday, August 12, 2014

Lower oil prices ahead over short term

I was on CNBC TV's live Fast Money show this evening talking about the likelihood of lower oil prices ahead in the short term despite geopolitical tension. WTI crude was $97.27 at the time of the show.  Watch the segment here http://cnb.cx/1rod7qB

Tuesday, August 5, 2014

Financial Chat War

[Financial chat systems are an anti-competitive tool?]

Just as John D. Rockefeller locked in customers and shut out competition by controlling the rail network in the early days of the oil industry, closed financial chat networks are used by financial platforms to lock trading floors into overly expensive systems and shut out competition.

As with consumer chat apps, like WhatsApp and Viber, traders and brokers on trading floors use chat systems to communicate in short bursts – sending transaction inquiries, prices, and interesting news stories to each other.

These financial chat apps can come bundled with full financial information platforms, like Bloomberg and Thomson Reuters, or can, as in the oil and equity markets, be like Yahoo Messenger – where the same app that is used by consumers is used for trillions of dollars of oil and equities trading each year. All of these chats are recorded and monitored by compliance departments. 

Money.Net provides a professional platform at a fraction of the cost

Going Viral with a Vector 
At a time when the cost to deliver financial information platforms is collapsing due to technology advancements, these savings are not passed on. The price of some of these platforms creeps ever higher to around $25,000 per year per individual. The ability to push through price increases and withhold cost savings requires an inability of customers to switch.

As chat networks are the ultimate ‘stickiness’ factor on desktop or mobile devices, expensive financial information platforms put a lot of effort into using entire market information platforms as a gateway onto a desktop for the Trojan Horse of a chat app.

Success for financial chat applications is dependent on getting on the desktop, and then getting turned on automatically every day as default components of full platforms.

Unlike consumer chat apps, it is much more difficult to make financial chat apps go viral. Getting any software onto a financial professional's desktop usually requires passing several gatekeepers. To address this, entire market information platforms sell themselves to traders as a utility for data and news, and then out of convenience traders begin using the chat system. Then after a trader has 5-25 connections on chat, the trader is stuck without the ability to easily change financial information platforms.

What to do? 
Several banks are trying to break their usage of chat. However, the challenge of launching a new standalone financial chat product is not the technology, which is somewhat trivial – it is getting on a desktop and getting a user to run it (whether they intended to or not) automatically each morning. Becoming part of a user’s daily routine is key.

Several banks are investing in a standalone financial chat app. The purchase of Perzo by Goldman Sachs brought this to the fore this week. There is also an Open Federated Chat initiative led by a few market information systems.  However, the hosts of Open Federated is a platform costing also a huge amount per month to have information plus the chat.

These standalone chat apps face the same challenge as every other system in first, getting on a desktop, and secondly, in having the user run the app each morning.

Maybe instead of using standalone chat apps to break financial chat systems open, entrepreneurs should instead focus on more open and less expensive financial platforms, which also have open chat. We at Money.Net believe that this is the model for future success.

In summary, financial platforms have become too expensive and financial markets are looking for alternatives by dancing around the edge with partial solutions, such as chat, to the core problem.  Instead, we should address the issue directly by passing on technology advancement savings to deliver lower cost and more innovative financial information platforms.  Open chat can be a part of this larger better solution.

We at Money.Net are the solution.  A complete fine platform with open chat integrated with everyone for a trivial cost per month.  Get it for everyone.

Morgan Downey is the CEO of Money.Net. Prior to Money.Net, Morgan was Global Head of commodities at Bloomberg, LP. Morgan managed development of the Bloomberg Professional terminal. At Bloomberg, Morgan used his market experience to build a suite of revolutionary, unique, and innovative products. Before Bloomberg, Morgan spent 15 years running trading desks, as manager and head trader, for banks including Citibank, Bank of America and Standard Chartered, in the US, UK, Australia, and Singapore. Morgan is the author of the book 'Oil 101', a best-seller explaining the oil industry. Contact morgan@money.net

Thursday, March 27, 2014

SPR: Oil Subsidy & Weapon

[SPR: Industry kickback, political slush fund, & weapon of war?]

The International Energy Agency (IEA) was formed by large net oil consuming nations in response to oil supply shocks of the early 1970s.  The IEA has required member nations, including the US, to have 90 days oil import coverage stored in a Strategic Petroleum Reserve (SPR).

The original mission of the SPR was to shelter oil consuming economies against unexpected oil supply shocks.  However, this mission expanded to become a free insurance policy for the oil industry as well as, most recently, an economic weapon. Releases are also occurring much more frequently just prior to national elections in net oil consuming nations.

Most countries require their oil industry to fund the 90 days of SPR. The US is different. In the US, taxpayers, via the Department of Energy (DOE), pay to store SPR oil.  The taxpayer funded US SPR currently holds 696 million barrels of crude oil (the red line below).

Free Insurance for the Oil Industry
This taxpayer funded storage failed to increase storage per oil consumer. It had the opposite effect.  As the US government (funded by taxpayers) began storing more and more oil in order to provide a buffer against supply shocks, it provided the US oil industry encouragement to do exactly the opposite - store less.  Storing oil is expensive, and so industry is happy to allow taxpayers to subsidize storage.

Running inventories so low is risky for private industry.  However, if industry runs short, due to a hurricane or storm, it now simply taps taxpayer funded storage without any penalty - effectively free insurance.  The frequency of these loans have increased dramatically since 2000.

New Economic Weapon
In addition to being a taxpayer-funded free insurance policy for the oil industry, the SPR has now become an offensive, rather than defensive, economic weapon.  The most recent volley from this weapon was a test release of 5 million barrels of oil from the SPR announced a few weeks ago coinciding with a hugely oil dependent Russia invading Ukraine's Crimea.

Today, a number of economic commentators are calling for use of this new economic weapon to be expanded.

Wednesday, November 20, 2013

Haymaker: The Origin of Big Natural Gas

[Natural Gas 101]

Natural gas, so called as it is naturally occurring rather than being man-made, has been piped in small volumes over short distances in the US for street lighting since the 1820s.  Manufactured gas, produced by processing coal in gas works, was carried out a few years earlier.  Both natural and manufactured gas were used on small scale street lighting.

It took a massive discovery on November 3, 1878 in Murrysville, near Pittsburgh, Pennsylvania to bring natural gas to widespread industrial and home use.  The well was drilled by the Haymaker brothers.

Obediah ("Obe") Haymaker was murdered for the discovery. His brother, Michael, lived to tell the tale.  The well is now forgotten, almost.

(click photo to enlarge - The plaque placed on a boulder at the well site in 1961 incorrectly refers to Michael Haymaker as Matthew.  The name Michael is confirmed from multiple published sources, including the 1880s New York Times.)

Obe and Michael had been looking for oil.  They had seen a neighbor using gas emerging naturally from a creek (usually a good indicator of oil) as a fuel to boil down maple syrup.  To the Haymakers' disappointment they stumbled upon natural gas alone, which is more difficult to transport than oil and thus to this day trades at a discount.

Natural gas emerged uncontrolled from the Haymaker well for three years.  As the capital-starved brothers were trying to finance, and later sell the well, it caught fire and burned for a further year.

Visitors from all over the US, including President Grover Cleveland, came to see the fire.  Finally, after four years, the well was tamed. Pipes were constructed to bring natural gas the 18 miles to steel producing city, Pittsburgh, Pennsylvania.  Most steel plants at that time used coal. This was the first industrial scale use of natural gas in the US. Air quality in Pittsburgh improved dramatically.

Apart from a boulder covered by a tree (see the photos above and below I took on a recent visit) in the backyard of a house (the precise location is oddly incorrect on both Google and Bing maps - the correct location is here), there is little marking the place: the site of riots; the murder of one of the wells discoverers; and the fuel that to this day powers a large portion of US and global electricity generation as well as cooking stoves, home heating, and a large part of the future of transportation.

(click photo to enlarge)

Below the fold is a detailed recounting of the discovery, published in a 1936 edition of Sun Oil Company's 'Our Oil'.  Sun Oil Company later became Sunoco Inc.  The article below (after the "read more" link) was written by Michael Haymaker, then 90 years old in 1936.

Thursday, August 29, 2013

Do Wars Cause Higher Oil Prices? Not Generally

[Wars are fought over oil.  But do wars mean higher oil prices?]

Military intervention by the US in Syria is looking increasingly likely. Here is a quick cheat sheet.

Many are calling for a rally in oil prices from its current $107 per barrel to $150 or $200 on the initiation of action.  Others are calling for a price spike higher which will quickly reverse.

Syria is a relatively small oil producer, with trivial production globally.   It's  the potential disruption from spillover into larger regional oil producing nations, including Iraq and Iran, that concerns oil consumers.

Predicting the reaction of the oil market in such situations is not straightforward and it's always worth considering a range of scenarios. It is precisely this uncertainty that has caused an abundance of caution historically, and caused supply-side over-reaction, with lower prices after Western forces finally act.

Over the past 30 years, military interventions involving external, US or UN, forces against Arab nations or Iran have generally resulted in lower oil prices.  It is only regionally internal, Arab vs Arab or Arab vs Persian, warfares that resulted in higher prices (charts below, click to enlarge). 

Perhaps this is because by the time Western military operations begin the market has already priced in the event due to a more free press. Traders monitor Western political sentiment, military jet fuel purchase requisitions, and fleet movements, ahead of time.  Or maybe it is the actual, or threatened, impact of an IEA global release of strategic petroleum reserves, along with the willingness of US ally Saudi Arabia to increase production from its spare capacity during disruptions.


Tuesday, June 18, 2013

Coming Soon...

Great to be back. So much to discuss... Follow along on Twitter: @CommodityMD

Sunday, January 31, 2010

Oil 101 Alternative Store

Amazon in the US often runs out of inventory of Oil 101 (as it appears to have over the past 2 days).  As an alternative, one can order from Barnes & Noble US.

Thursday, January 28, 2010

Panama to Reduce US Oil Consumption

Today when a consumer on the US east coast buys a Chinese manufactured product it is highly likely it was shipped across the Pacific to Long Beach, California and then trucked using diesel fuel via road or rail across the US. 

Bloomberg has an interesting story on the effect the expansion of the Panama Canal could have on US railways.  The canal expansion may be among the largest fuel savers for US consumers over the next 15 years.

Monday, January 25, 2010

Regular Car, Premium Gasoline

An increasing number of regular looking vehicles in the US are requiring high octane premium gasoline.  These vehicles include the tiny Smart fortwo and a variation of the Volkswagen Jetta.

Is this premium fuel requirement a stealth move for some auto manufacturers to gain market share?  Has this increased sales of high octane gasoline relative to regular octane gasoline in the US?

Octane Ratings Explained
Octane ratings are the numbers printed on a gasoline pump often labeled regular, midgrade and premium.  In the US regular gasoline is greater than 85 and less than 88 octane, midgrade is equal to or greater than 88 and less than 90, and premium is equal to or greater than 90. In Europe and Asia the number on the pump for equivalent fuel is usually 5 points higher.  In other words 87 on a pump in the US is equivalent to 92 on a pump in the UK.

Octane rating has little to do with the energy content of the gasoline.  It has all to do with how much volume of the gasoline can be squeezed, or compressed, into an engine cylinder without the gasoline igniting before the spark plug fires.  Gases heat up when compressed and gasoline engines are tuned to compress the gasoline as much as possible without compressing it so much the fuel burns without a spark plug.  The goal is for the timed and synchronized spark plug to ignite the fuel when a piston reaches the top of the combustion chamber.  If ignition due to compression (rather than the spark plug) occurs then an engine can be damaged. 

Many new cars requiring high octane fuel can tolerate slightly lower octane because their computers adjust for the less compression ignition resistant fuel, but there is typically a lower power output and one should only do this if a vehicle manufacturer says it is ok for your engine.

As gasoline with higher octane ratings resists compression more than regular can be added to the combustion chamber on each stroke of the engine.  This higher compression tolerance allows more more gasoline to be burned and more power on each stroke.  This is why racing cars use high octane gasoline.

Why don't all cars use high octane gasoline? There is a substantial incremental cost for a refinery/gasoline blender to raise the octane of gasoline.  Higher octane requires expensive gasoline blendstocks and consumers are sensitive to increased gasoline prices. 

The additional fuel cost to a driver for high octane gasoline compared to regular is around US$100-US$200 each year (based on 10,000 miles per year in a 25MPG vehicle).

Should one fill up with higher octane than a vehicle manual suggests?  No.  It will likely be a waste of money without any improvement in performance.  If your vehicle manual recommends regular octane then just use regular. 

Use high octane gasoline if you have a vehicle with a high compression engine and your vehicle manual recommends it.  However, as mentioned above, some vehicle manufacturers say their engine computers can adjust to handle lower octane rated gasoline.

High Octane Gasoline No Longer just for Sports Cars
In the past high compression gasoline engines were primarily used in sports cars and luxury high performance vehicles.  Now more vehicle manufacturers are putting high compression engines into what would not generally be perceived as being a sports car.

One reason vehicle makers are doing this because it improves the statistics consumers look at when purchasing a vehicle.  A high compression engine running on premium will accelerate a vehicle from 0 to 60 MPH faster than a low compression engine.  Consumers rarely ask a car dealer which octane rating of gasoline a vehicle burns.  They do ask how quick the vehicle acceleration is from a standing stop and on a test drive will notice the peppiness and responsiveness of a high compression engine. 

Has Demand for Premium Gasoline Changed?
In summary, the number of vehicles requiring premium (high octane) gasoline (rather than midgrade or regular) has been increasing in the US because vehicle manufacturers have realized that high compression engines can increase vehicle sales by enhancing the statistics consumers look at and the test drive experience.  One could surmise, therefore, that the percentage share of premium gasoline being sold in the US has been steadily increasing as these new vehicle owners dutifully follow vehicle manufacturers' recommendations. 

The data shows that most of these high octane requiring vehicles are being filled with lower octane fuels.  The percentage of premium relative to total gasoline sales has been steadily falling (see chart below): 

(click chart to enlarge)

It is likely the nod from some vehicle manufacturers that onboard computers can adjust newer high compression engines to handle lower octane gasoline that gives comfort to some owners.  Another way of looking at the data is that these new, often unsuspecting, high compression engine owners are attempting to save at the pump having hastily splurged on a sprightly engine.

(Why is "octane" the name used for the compression resistance of gasoline?  Read Oil 101, Chpt. 9)

Sunday, January 24, 2010

USGS Finds New Saudi Arabia! Oh, wait...

The BBC over the weekend had the headline: Venezuela oil 'may double Saudi Arabia'.  The headline was based on the just released assessment of Venezuela’s hydrocarbon deposits by the US Geological Survey (USGS).  Venezuelan oil is described as: "the largest accumulation ever assessed by the USGS".  The USGS mean estimate of recoverable Venezuelan oil is 513 billion barrels.

The USGS number is over five times 'Oil and Gas Journal's' estimate of 99 billion barrels for Venezuelan proven oil reserves.

To put all these billion barrel numbers in perspective, global consumption is currently around 30 billion barrels per year.  Saudi Arabia's oddly static (see Oil 101, Chpt.14) stated proven reserves are around 260 billion barrels. One could almost drive two Saudi Arabias between the 513 billion and 99 billion barrel estimates for Venezuela.  Which number is closer to the truth?

It comes down to the types of reserves being defined.  The USGS number refers to hydrocarbons technically recoverable if one completely ignores costs.  The 'Oil and Gas Journal' number factors in technical feasibility just like the USGS but additionally the economic cost of extracting heavy Venezuelan oil using similar processes to Canadian oil sands production.

The USGS has no mention of the fact that the costs to extract much of the hydrocarbons from the Venezuelan accumulation could be over US$200, US$300 or even US$1000 per barrel and would thus be unlikely to ever be produced.

Only in the very last paragraph (pdf) of the USGS report is there any attempt to put some perspective on their headline grabbing number: "No attempt was made in this study to estimate either economically recoverable resources or reserves within the Orinoco Oil Belt AU. Most important, these results do not imply anything about rates of heavy oil production or about the likelihood of heavy oil recovery. Also, no time frame is implied other than the use of reasonably foreseeable recovery technology." 

This sort of key disclaimer would be more appropriate in an opening paragraph.
The USGS say that their report is "critical to our understanding of the global petroleum potential and informing policy and decision makers."  How many policy and decision makers will read past the headline and opening paragraphs to understand that economics played no part in the analysis?

(HT/Terry G. for sending related link)
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