Tuesday, April 19, 2016

Oil Momentum?

Some, but not a lot of evidence to suggest oil can break out of current pricing period, especially given political risk to the downside.

Price vs Price-Low Price (as a % of Price) in graph 1.  In graph 2, momentum of high vs low. In graph 3, 90 day cumulative momentum vs, current pricing period vs outright price.

Thursday, March 17, 2016

Model Behavior.

1.See Macro model one post below.

“Strange, strange are the dynamics of oil and the ways of oilmen.” Thomas Pynchon, Gravity's Rainbow (1973)

Research Model
The theoretical model that I am proposing is a combination of learnings: academic, professional and personal.  I began as a scattered student at the University of Calgary. At that time, my psychic energy was directed towards a struggle with my DNA.  The Jesuits at Fordham in New York City graciously offered me the opportunity to focus. Professionally, the model is the derivation of the daily grind of working for big government and big oil in Washington DC, and Calgary, Alberta. The producer is where one best learns oil fundamentals and price movements. My deepest knowings, however, come from my family history, described in this essay.

The model is primarily concerned with the global physical and paper markets for oil and the predictable effect on the small producer’s macroeconomy, during or after a shock of some sort.  Most traders and analysts, conceive of commodities as cyclical. It would follow then, that there are known patterns to uncover, if one can only apply the proper model and mathematics.

There are a couple of reasons this model matters.  In a world that is (rightly) moving towards de-carbonization there is much volatility on the horizon for oil producers and consumers alike. A motivation for this work is to understand what lessons might be shared with policymakers and stakeholders. Where there is a historical pattern, there is not only learning for the academic and policymaker, but also a more clear policy prescription.

Family Connection to the Model
During my life, I understood three truths about the oil business.  I believed that there was nothing worse than an oil price collapse. I understood that national energy policies were federal machinations. And I would have bet my life that the Saudis were out to get us.

In 1986, I was 8 years old.  Up until that year there was not much to-do about politics or the stock markets. My father had noxious reactions to the men on the CBC, but this was normal. Who was this Saudi Arabia, and why did he hate us? My sister and I spent the summers hitting tennis balls against the garage door. My mother had migraines.   

Each July or August, the exact week dependent on my grandparent’s temperament, we were allotted our time at the family cabin. Around 1980, Charlie and Rose Dunkley built two waterfront cabins, on a southwest bay near the Cinnemousun Narrows on Shuswap Lake. In Secwepemc language, Cinnemousun means to "come and go back again.”   The Wild Rose Bay has unsurpassed views of the majestic British Columbia surroundings, and was the chosen spot of oil executives from Alberta, who began to aggregate to waterski and play bridge in the summers, when energy prices climbed in the late 1970’s.

Charlie Dunkley was Dome Petroleum’s third employee. He started with Dome sometime in the 1950’s, as a young and ambitious engineer. Although Charlie was outwardly stolid, he was an inveterate gambler and risk taker. As such, he fit with Dome’s dreamy culture of gutsy acquisitions and Dome’s larger-than-life founder, Jack P. Gallagher.  Charlie became the company’s Senior Vice President of Exploration, and the company grew quickly.  Jack and Charlie both believed that energy in the North, that is the Beaufort Sea and the Arctic islands, would be imperative to North American energy security and Dome's critical reserves in the long-run. The men shared the theory that the demand for oil and gas would outpace supply, indefinitely.

In the end, the management combination of Jack Gallagher and Charlie Dunkley was lethal to Dome’s shareholders.  ‘Smiling Jack’, as he is still called in Calgary today, was arguably Calgary’s most persuasive oilman of all time – a lobbyist to lobbyists. “[Jack] sold his vision of the Beaufort to bankers and government without ever providing any tangible return to justify such major expenditures,” wrote Peter C. Newman in the Canadian Establishment. Jack and Charlie allowed Dome to become fatally leveraged by selling future production on the bet of ever-higher prices.  Dome offered Charlie a bon voyage trip around the world, when Jack and he sparred over the Hudson Bay Oil and Gas Company acquisition, sometime in the early 1980’s.

Prior to 1986, I knew about none of this. Charlie cooked the grand-kids waffles every morning at 8:30am, a preface for delegating chores. The adults were on deck for a gin and tonic at 4:30pm. Down on the dock, my sister and I became show ponies: “One for the money, two for the show, three to get ready, go baby go!” Jump now, or the Dunkley men would make it now.

For my sister and for me, and for the cousins we spent our summers with, these were happy memories.

In 1986, this summer patina went away. Like white chalk on a white board, life’s patterns became unreadable to me. There were no more calls for breakfast. Charlie would trade stocks in his basement each morning in Eastern Standard Time, until there were no stocks left to trade. Rose Dunkley, the consummate yeller, went quiet. She took to her vermouth at 3:30pm.  

At his funeral, Charlie’s three sons bemoaned that he so despised the federal government that his failure to cash-in on his Dome fortune was a principled stance on the capital gains tax. Actually, as early as 1981 both Charlie and Jack were caught off guard by unforeseen market forces and debt service.  Neither man could recover their balance so to speak.

The New York Times wrote about Dome’s financial problems in 1982:
“Today Dome Petroleum is not only in trouble but also is tarnishing the Canadian Government's National Energy Program and making five of the country's major banks extremely edgy about the losses they are risking.

The company has historically relied on heavy borrowing to finance its growth, but its debts now are staggering and coming due fast. By the end of 1981, Dome Petroleum's long-term debts were bigger than those of the Ford Motor Company and the Chrysler Corporation combined. As of March 31, Dome reported total borrowing of $5.8 billion (Canadian money) and no cash or short-term deposits whatsoever. A Canadian dollar is now worth about 78 United States cents.”

In 1987, my father was also financially insolvent.  His debt was less than C$13,000, as I remember it. He would not speak of his bankruptcy to his parents. It’s the “fucking Feds,” he confided in me, however.  When we were forced to move from our family home, on account of these Feds, I joined his cause in total solidarity.

The gates to heaven and hell are extremely close. With the right hand you can open one, and the left hand you can open the other. Niko Resources is another Calgary company that chose the wrong hand.
For years, Niko was the investor darling of the oil and gas community.  The once-great company also lost its way due to executive mismanagement and excessive price optimism.

In 2005, following a blowout at one of its natural gas wells in Bangladesh; the company bribed a government official and got caught.  Perhaps this moment was the start of Niko’s long and tortuous decline. Or perhaps it was just a single public display of the company’s culture of corruption, well in-tact by 2005.

One of Niko’s early and seminal figures was a geologist who prognosticated of prolific oil and gas finds and instilled investor confidence, much like Jack Gallagher. He was both believable and comforting, but not flashy.  I would never meet the one-time president and director of Niko Resources*, but Bob McPherson, would come to mean much to my life from 2007 to 2015.

In 2007, Alberta’s oil and gas scene was hot, and so was my father’s latest venture. His partner, a geologist trained at the University of Manitoba, was “brilliant.” My father raised C$6 million* in seed capital. The plan was to drill on the southern border of Alberta and Saskatchewan using a modern technique called horizontal drilling. All the brilliance resulted in two dry holes. The company folded.

By the time Bob McPherson partnered with my father, Bob’s financial accounts were solidly frozen by the Canadian Revenue Agency (CRA)*. The genesis of McPherson’s long and acrimonious relationship with the CRA was alleged misconduct in relation to a mining operation somewhere in South America. In retaliation, the CRA froze all of Bob’s financial assets, including his vast holdings of Niko stock. This happened at a time when Niko was trading around C$90.00 per share*. My dad relayed the story, incredulously.  It was all a terrible misunderstanding.

In 2008, I had my own financial woes to manage.  I owed C$90,000 of student and personal debts.  I was on the verge of deportation from the USA. Personally, I was in decline. I fell for an absentee boyfriend fighting the Neocon’s war in Iraq. My father, always upbeat “[we] are close to a new world order… gold is, and will always be, the only true form of currency.”  I thought of my grandfather, Charlie. At Christmas, he would pass out gold kilo bars to his three sons. An attempt to alleviate them from the pains of their 30's, in his own way, I imagine.

Bob McPherson and Gordon Dunkley would name their new venture 2Can Mining. Although my father had no experience in panning for gold, he would manage the operation. The operation failed to produce but flakes of gold, but it did hold my father’s attention for what seemed like an interminable amount of time. Time passed, and creditors came to the door. The solution, as always, was to move, as my mother refused to answer the door.

There’s an old saying that ‘the truth will rise above falsehood like oil above water.’ In our case, the truth freed us in the form of an angry missive dated March 26, 2015 and copied to my mother. Merely days before the destruction of all official bank records, a group of unsettled investors, managed to resuscitate the necessary evidence that would air the story of my family’s most recent history.

Alberta 103XXXX was a real estate fund, comprised of a pool of the elderly, family and friends.  These were the types of investors my father usually hit up for such ventures.  The company had gone belly-up during the Great Recession. This seemed normal enough, and the numbered company naturally faded from the family purview.

The truth was Alberta 103XXXX was a smashing success.  As such, my dad was able to clip many hundreds of thousands over to 2Can or some other cockamamie ideas. He staved off his shareholders with years of “wild and wonderful stories.”

The total owed including all alleged mismanaged funds was tallied at many (many) thousands of dollars. The missive gave three business days to act, or [warned] ‘’the pursuit of all available legal avenues, which may include criminal sanctions”.

The reason for my mother’s involvement was the true family revelation. The aged sleuths had uncovered she was an unwitting, and sole director of the family consulting company for the years in question.  A parting legal gift from my dad, as he filed for divorce.

My father confessed to me that he managed his financial wizardry by transferring incremental sums to Mr. McPherson each month, for almost half a decade*. “I was both a victim and perpetrator,” he waxed poetic.  

God has the greatest sense of humor.

Alberta 103XXXX was my father’s most profitable undertaking in a decade.  A successful real estate deal handed to him in the greatest housing crisis of a lifetime. The fruits of labour then passed on to a con man in a toupee.

Oh, that search for the ever-elusive father figure.

In the backdrop, an Alberta Judge was busy scolding said con man “…your actions in setting up a company under the dummy leadership of your daughter in the conduct you did was disdainful.” McPherson’s other illegal activities included breaching a 2006 Alberta Securities order that banned him from trading in securities and acting as an officer and/or director of any issuer, among a long list of other transgressions. At the age of 70, Bob McPherson was sentenced to an Alberta prison for 27 months.

My father made note of all of this, and began to pack up for a country where the weather is nice.
My father wrote to me from abroad in the summer of 2015. He had a different direction. His partners would sell green utility technologies, and contribute positively to the energy space. The oil era was over; the wise person accepts the nature of things.  Would I mind helping with his presentation?

"One for the money, two for the show, three to get ready, and the next one is sure to go."

It is said that even the truth will become a lie if it enters your being through the wrong door. It will be a belief, it will be a knowledge, but not a knowing. Truth has to enter one through the front door, through the eyes, so that one can really see it.

There is only one truth about the dynamics of the oil markets, as I can see it now. The oil price will go up, and the oil price will go down.  

Oilmen should prepare for both and it maybe it wouldn’t end up so damn strange.

*Family events as I remember them. Dates, times and certain facts subject to my perspective or memory. All legal issues have since been resolved, no inference is to be made about liability or wrongdoing by any party other than Mr. McPherson. This has been assessed by the Alberta Securities Commission.

Oil Shocks and Transmission to the Macroeconomy of a Small Producing Nation.

1.          D= Global Demand
2.          S= Global Supply (Cost Curve)
3.          IR= World Interest Rate
4.          Toil = Traded Price on the Futures Market
5.          Poil= Fundamental Price (Supply Demand /Equilibrium)
6.          Toil-Poil=Commodity Risk Premium
7.          Toil1-Toil2= Total Price Shock
8.          FC= Futures Curve (Oil)
9.          Short Dated Curve: f(Commodity Price Risk)+ f(Physical Equilibrium)
10.       Long Dated Curve: f(Physical Equilibrium)+(f(-1)(Real IR)f( Average Marginal Cost of New Supply))

Example as Shown due to a supply shock causing price decline:
1.      Global  Supply Curve Shifts Right
2.      Global  Price of Oil Declines
3.       Futures curve moves from backwardation to contango
4.       Short Term Commodity Risk flips (positive risk to negative price risk and lengthens to due political risk of shock)
5.       Low Oil Prices Increase Global (Y) and over time expected inflation rate (C)
6.       World Real Interest Rates Rise from IR1 to IR2 as economy improves (exogenous, policy)
7.      Small Producing Nation keeps domestic interest rate at Real IR1 (exogenous, policy)
8.      Producing country experiences increased Net Capital Outflows
9.      Real Exchange rate depreciation in producing country
10.  IS-LM cycle

Classic Macroeconomic Constraints:
Nominal IR = Real IR+ Expected Inflation Rate
S= (X-M)-(Tax-TR-G)+I=National Savings


 A model I have been thinking about lately...since our 20 month commodity slide.