FRAMINGHAM, Mass. -- In his fabulous book about prediction, Nate Silver introduced the concept of distinguishing between the signals and the noise. Although Silver famously missed the prediction on our recent presidential election, his predictive powers are still among the best, and the concept in markets to ignore the ripples and look out for the waves is exceptionally sound.
When I first learned trading, the expression was price moves along a curve of supply and demand. But the real money is made by anticipating the shifts in the curve, which come from technology, demographics and more substantive change and have a more permanent and dramatic impact on prices.
If you’re a technical trader, the charts are signaling further downward pressure, if not capitulation, as the 10- to 20- and 50-day averages move under the 200- and 400-day moving averages. If you belong to the “fundamental” school of trading, you are well aware we are awash in product as wholesalers and suppliers claw for customers and overall stocks are at three-year highs.
This outcome is not simply driven by a temporary move along the supply and demand curve but by a tectonic shift in the energy world from five major areas:
- The marginal cost of finding and extracting hydrocarbons has fallen by 50% in the past decade, and it is not all because of shale. Technology has improved in finding reserves, directing drilling and using advanced recovery techniques. The Mideast marginal cost is $10 per barrel; the United States is at $25; Russia and Indonesia are at $20; Nigeria, Venezuela and Canada are $30; Brazil is at $35; and North Sea is at $40 per barrel.
- The need for foreign reserves in state klepto-economies and debt service in capitalist economies has forced producers to keep the pedal on the metal.
- We have ample refinery capacity worldwide, including new mega complexes in Asia and refinery creep in existing North American and European refineries.
- Consumption has collapsed from Corporate Average Fuel Economy (CAFE) standards; greater vehicle efficiency; the expansion of biofuels and ethanol in the transport pool, and other transport fuels; urbanization; and a decline in miles driven.
- There is a regulatory drive to mitigate carbon and place the Renewable Identification Number (RIN) obligation point upstream.
This is great news for consumers and the United States in general and should be with us for the remainder of this decade at least. Low energy prices, low interest rates and an improved balance of payments should help us achieve 4% GDP (gross domestic product) growth and even higher equity prices.
What could change and reverse this tsunami of supply? The easy answer in energy is always:
- The Mideast (low energy prices sparked the first Gulf War)
- Collapse of Venezuela and Nigeria (almost a certainty)
- South China Sea eruption (next major flash point)
- Refinery closures from regulators, disaster or bankruptcy
- Shale curtailment
- Carbon tax
- Removal of ethanol and biofuels from the transport pool
Anything can happen and it often does in the energy world. But for now and the foreseeable future, this is a buyers’ market of epic proportions.