• 4 hours WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 9 hours Norway Grants Record 75 New Offshore Exploration Leases
  • 13 hours China’s Growing Appetite For Renewables
  • 16 hours Chevron To Resume Drilling In Kurdistan
  • 19 hours India Boosts Oil, Gas Resource Estimate Ahead Of Bidding Round
  • 20 hours India’s Reliance Boosts Export Refinery Capacity By 30%
  • 21 hours Nigeria Among Worst Performers In Electricity Supply
  • 1 day ELN Attacks Another Colombian Pipeline As Ceasefire Ceases
  • 1 day Shell Buys 43.8% Stake In Silicon Ranch Solar
  • 2 days Saudis To Award Nuclear Power Contracts In December
  • 2 days Shell Approves Its First North Sea Oil Project In Six Years
  • 2 days China Unlikely To Maintain Record Oil Product Exports
  • 2 days Australia Solar Power Additions Hit Record In 2017
  • 2 days Morocco Prepares $4.6B Gas Project Tender
  • 2 days Iranian Oil Tanker Sinks After Second Explosion
  • 4 days Russia To Discuss Possible Exit From OPEC Deal
  • 4 days Iranian Oil Tanker Drifts Into Japanese Waters As Fires Rage On
  • 5 days Kenya Cuts Share Of Oil Revenues To Local Communities
  • 5 days IEA: $65-70 Oil Could Cause Surge In U.S. Shale Production
  • 5 days Russia’s Lukoil May Sell 20% In Oil Trader Litasco
  • 5 days Falling Chinese Oil Imports Weigh On Prices
  • 5 days Shell Considers Buying Dutch Green Energy Supplier
  • 5 days Wind And Solar Prices Continue To Fall
  • 6 days Residents Flee After Nigeria Gas Company Pipeline Explodes
  • 6 days Venezuela To Pre-Mine Petro For Release In 6-Weeks
  • 6 days Trump Says U.S. “Could Conceivably” Rejoin Paris Climate Accord
  • 6 days Saudis Shortlist New York, London, Hong Kong For Aramco IPO
  • 6 days Rigid EU Rules Makes ICE Move 245 Oil Futures Contracts To U.S.
  • 6 days Norway Reports Record Gas Sales To Europe In 2017
  • 6 days Trump’s Plan Makes 65 Billion BOE Available For Drilling
  • 6 days PetroChina’s Biggest Refinery Doubles Russian Pipeline Oil Intake
  • 7 days NYC Sues Five Oil Majors For Contributing To Climate Change
  • 7 days Saudi Aramco Looks To Secure $6B In Cheap Loans Before IPO
  • 7 days Shell Sells Stake In Iraqi Oil Field To Japan’s Itochu
  • 7 days Iranian Oil Tanker Explodes, Could Continue To Burn For A Month
  • 7 days Florida Gets An Oil Drilling Pass
  • 8 days Oil Prices Rise After API Reports Staggering Crude Oil Draw
  • 8 days Tesla Begins Mass Production Of Solar Shingles
  • 8 days EIA Boosts World Oil Demand Forecast For 2018 By 100,000 Bpd
  • 8 days Businessman Seeks Sale Of $5.2B Stake In Kazakhstan Oil Field
Alt Text

World Class Copper Auction Draws Major Interest

Peru’s mega Michiquillay copper is…

Alt Text

This Major Political Shift Could Rock Copper Markets

Chile’s upcoming Presidential elections could…

The Coming Copper Crisis and Price Forecasting - Is There a Better Way?

The Coming Copper Crisis and Price Forecasting - Is There a Better Way?

David Threlkeld of metals trading advisor Resolved Inc. got some press this week.
That happens when you predict a catastrophe.

Threlkeld was quoted by Bloomberg repeating an ominous prediction he first made in May 2006. The call? That the copper market is heading for a catastrophic collapse. With the LME price falling to below $1 per pound.

Threlkeld has some credentials. He was one of the first to expose rogue copper trader Yasuo Hamanaka in the mid-1990s. And point out that Sumitomo's hoarding of copper was having an undue effect on prices.

His arguments on the coming copper crisis make some sense. Basically, that most of the world's buying today is from speculators. Investors who will dump the inventory back on the market at the drop of a fedora if sentiment shifts.

Threlkeld's call adds to an ever-present tapestry of forecasts on metals prices by thousands of analysts globally.

People watching commodities markets love to make predictions. On where prices will be a year, two years or ten years from now. Every brokerage house turns out a slate of forecast prices for oil, copper, sugar and every other hard asset.

Pulling exact prices from the future is critical for investment advisors. Brokerage house analysts love to build financial models to predict the value of resource companies. But knowing how much oil a company will pump, or how much copper it will mine, is only part of the cash flow equation. You also need the value per barrel or pound of metal. Then it's simple multiplication to derive revenue streams and figure out a net present value.

So analysts pick a number. In gold for example, brokerage house forecasts for the coming year are running between $800 and $1250 per ounce.

The problem with analyst price forecasts is they tend to be lagging indicators. Most observers base their predictions more on what has happened than what will take place down the road.

When spot commodity prices fall, analysts revise their forecasts downward. Predicting doom and gloom. But when prices rise (as they have over the past year), observers reverse course and upgrade their forecasts. The present always colors our view of the future.

The end result being forecasts are almost always wrong. They're too bullish in good times, when things are getting ready to turn bad. And they're too bearish in bad times, just before a recovery. But everyone gets caught "staring at the sun", fixated on a single point that must represent what's ahead for prices.

The forecast system doesn't work. Why then are we so obsessed with jamming the future into a down-to-the-cent prediction?

Probably because we see no other way. If we're investing in commodities we need to have some view on forward prices, right?

But there is at least one alternative to forecasting. Scenario planning.

The use of scenarios to guide investment decision was pioneered by Shell in the 1960s and 1970s. At the time, the company noticed its oil price predictions were almost always wrong. And they set out to find a better way of supporting their business planning.

They came up with scenarios. As with conventional analysis, the company started by gathering all the data they could on the oil market. What factors drove pricing? How were these changing? What wouldn't change in the market? What events were completely impossible?

But here's where Shell departed from conventional forecasting. Instead of cranking out an exact price for the coming year's crude, they used the data to create stories about what the oil market's future might look like.

Shell realized there were certain features of the oil market that couldn't be predicted. A nation might or might not embrace energy efficient technologies, reducing oil demand. OPEC nations might choose to increase or decrease supply, depending on the whims of rulers.

Trying to make a single prediction about how these factors would play out (and derive a resulting price forecast) was ludicrous. There was just no way to nail down these uncertainties.

So Shell split the difference. They constructed one scenario where things went one way. Then another where the opposite happened. Boiling it down, they created two or three "stories" about what the coming oil landscape could look like.

Maybe it would be a "tight supply" world, where energy efficiency is rejected globally while OPEC cuts off supplies, leading to a race for oil and rising prices. Or, alternatively, it might be an "oil glut" world where nations reduce crude consumption even as producers pump out more supply.

These scenarios were closely constrained by data. But they left designers free to imagine different possibilities about how things might play out.

Importantly, no price forecasts were derived from these scenarios. The stories were used as general guidelines for how prices might fair. Giving management ideas on what they should watch for in the market. And how they should deploy their capital in an uncertain world.

How did the exercise work out? Pretty well. Shell was one of the only oil majors to foresee (at least in some form) the oil shock of the 1970s. Enabling them to respond quickly when the crisis hit.

Since then, Shell regularly uses scenarios to envision the future of energy. You can read their current stories on energy futures on the company website.

Commodities markets are big and complex and uncertain. Maybe it's time we stopped trying to "magic eight-ball" an exact price for oil, gold and copper.

Acknowledging uncertainty, we might be oddly more prepared for the future.

Here's to Shell's scenario pioneers,

By. Dave Forest of Notela Resources




Back to homepage


Leave a comment
  • Anonymous on February 05 2010 said:
    This is completely wrong-headed, but I don't blame the author because he's just another victim of the way economics has been taught for so long.
    Commodities - like other products of nature - rightfully belong to all of us. The results of productive activity (drilling oil, refining it, distributing and selling it) belong to the producer. Tax the first 100% and untax the second. Speculation will vanish because it will be taxed away (we could hold an annual auction if no experts can be found to reliably price oil). Companies won't sit on valuable land waiting for the price of oil to go up before drilling. Oil - and every other commodity - will achieve rough equilibrium (oil going from $147/barrel to $35 in a single year, when the demand varied maybe 5% is absurd). Governments will be funded (oh, we should also tax the abuse of nature - air, water, land pollution), and true producers will be rewarded for their labor.
    This Geonomic, or Georgist, solution has stood the test of time (130 years) and has worked everywhere it has been tried - that is, until greedy speculators overturned such measures).
  • Anonymous on April 22 2010 said:
    Our markets have been hijacked by manipulative speculaters who bring no value, they call themselves masters of the universe and they only take. The Governments have promised to clean up this mess let's hope they do as they say.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News