Report: Commodities Demystified – A Guide to Trading and the Global Supply Chain

Date of Source: 2016

Summary:
Commodities trading – supply of the basic staples that are converted into the food we eat, the industrial goods we use, and the energy that fuels our transport and heats and lights our lives – is one of the oldest forms of economic activity, yet it is also one of the most widely misunderstood. At no time has this been truer than in the last 20 years, with the emergence of a group of specialist commodities trading and logistics firms operating in a wide range of complex markets […] 

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Reblog: Grossly Distorted Prosperity — Surplus Energy Economics

Date of Source: 30 Oct 2016

Summary:
ECONOMIC DECELERATION – AND HOW TO MEASURE IT One of the quirks of economics is that, within GDP (gross domestic product), all output is included, irrespective of what it really adds to prosperity. GDP, like Oscar Wilde’s cynic, knows “the price of everything, but the value of nothing”. If government paid 100,000 people to dig […]

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Drilling For Value, Appendix B: Commodity Price Forecasts (or, why commodity price forecasts are mostly worthless)

Summary

  • Equity investments into upstream oil and gas companies are largely levered commodity price plays; long-term total returns barely offset the carry costs of taking a long position in oil futures.
  • There are multitudes of ways by which experts seek to forecast future commodities prices; most don’t work.
  • The failure of forecasting should not be surprising if the Efficient Market Hypothesis is even partly correct.
  • Even barring market efficiency, behavioral models provide ample reason for the widespread inaccuracy of forecasts.
  • The idea that commodities prices — including oil — follow a random walk is both overwhelmingly supported by evidence and practical.

Figure 1: Black Gold

Source: Andy Thomas. Black Gold

Evidence overwhelmingly supports the notion that investments into upstream oil and gas producers are basically levered commodity price plays. This, and the fact that commodities producers are price-takers, indicates that petroleum economics are overly levered to commodities prices. It should follow, therefore, that an ability to accurately predict petroleum prices could result in advantageous market timing — i.e. investments in the right petroleum producing assets during the right times in the cycle. As a result of this ostensible potential for riches, prognosticators have devised multitudes of ways to forecast oil prices. Unfortunately, most of these efforts fall short of useful — no known forecasting approach, not even futures strip prices, significantly outperforms the assumption that price evolutions are random walks using out-of-sample data. This failure is not surprising, however, if we are to believe even a watered-down form of the Efficient Market Hypothesis (EMH).

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Drilling For Value, Appendix C: Discounting Theory and Practice

Summary

  • Discount rates are a cornerstone of modern valuation methods for discounting the value of expected future cash flows.
  • Upstream valuation professional systemically utilize elevated discount rates well in excess of rational expectations for long-run capital growth.
  • The use of elevated discount rates may have roots in Modern Portfolio Theory, heuristics regarding the aggregation of well-level economics, and as proxies for high expected rates of depletion.
  • Re-calibration of investors’ rational expectations indicates that lower discount rates may be more appropriate for evaluating long-run returns.
  • Discount rates are simply a means by which to equate dollars in different time-periods — any further deliberation is likely to suffer from diminishing returns.

Figure 1: Sunburst – Pumping UnitSource: Greg Evans. Sunburst – Pumping Unit. Art Gallery of Greg Evans

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Drilling For Value, Appendix A: Energetic Factors of Resource Economics

  • Energy Return on Energy Invested (EROEI) is a popular metric for resource quality which attempts to cut through economic distortions caused by taxes, subsidies, and current market conditions.
  • Energetic factors of resource intensity and efficiency also have practical applications for estimating long-term resource project economics.
  • Declining EROEIs, which have been hyper-politicized by peak oil enthusiasts, have been counteracted by gains in full-cycle energy efficiencies.
  • Though other energetic measures of return incorporate financial metrics, EROEI is still the purest key performance metric which exposes an energy resource’s underlying and long-term profit potential.


Source: Frank Reilly (Illustrator). Oilfield WorkerLiberty Magazine. 10 March 1945.

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MIT Energy Initiative: Venture Capital and Cleantech — The Wrong Model for Clean Energy Innovation

Date of Source: 01 Jul 2016

Summary:
Venture capital (VC) firms spent over $25 billion funding clean energy technology (cleantech) start-ups from 2006 to 2011 and lost over half their money; as a result, funding has dried up in the cleantech sector… We conclude that the VC model is broken for the cleantech sector, which suffers especially from a dearth of large corporations willing to invest in innovation… If a new and more diverse set of actors avoids the mistakes of the cleantech VC boom and bust, then they may be able to support a new generation of cleantech companies. […]

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Motley Fool: 5 Point Checklist for Investing in Big Oil

Date of Source: 26 Jun 2016

Summary:
In the stormy seas of the energy market, Big Oil companies have been one of the few beacons of stability. As oil prices declined more than half over the past couple of years, companies with exposure to every facet of the oil and gas value chain saw declines ranging from 10% to 30%. To some, this stability and the traditionally generous dividends have made for a compelling investment thesis, but actually getting to know and understand the complex world of Big Oil companies is far from simple. […]

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IHS Markit Blog: The emerging technology of re-fracturing horizontal wells

Date of Source: 10 Jan 2017

Summary:
As fractured horizontal wells which sparked the American Energy Renaissance rapidly deplete, technologies such as refracturing will be needed to extract more of the original hydrocarbons in place from low permeability reservoirs. If the method is broadly applicable and successful, it is likely to prolong the energy boom a while longer. The author’s geological simulations of refracturing suggest that recovery factors could double in many already prolific North American shale plays. […]

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OilPrice.com: Japan Is Aggressively Buying Up Oil And Gas Around The World

Date of Source: 24 Nov 2016

Summary:
Yes, energy prices are depressed right now. But not everyone sees that as a negative. In fact, private equity funds are still raising record amounts of capital for energy investments — with managers and investors alike seeing the current downturn as a prime time to pick up good assets for cheap. […]

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Oil & Gas Financial Journal: “Great Basin Elephant Hunt: The Great Basin Shales are not just as orginically rich as other shales, they are many times thicker”

Date of Source: 18 Jan 2017

Summary:
The Great Basin, which underlies most of Nevada and large swaths of the American Southwest, could become host to the next great North American hydrocarbon province. Although production from the Great Basin slipped to a mere 313,000 BOE in 2014 (from its peak of 4.01 MMBOE in 1990), the region is still largely unexplored. Geologist Alan K. Chamberlain believes that there are potentially hundreds of billions still left in geological formations underlying the Great Basin. […]

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