By Joe Petrowski
I have spent a lifetime trying to forecast and improve my forecasting in all types of commodities, and most recently energy. And while forecasting is certainly critical to proprietary trading and procurement, it is a critical skill set for managers, executives and political leaders. In fact, as a member of the near-retired class the forecasting of equities, interest rates, real estate prices, political winds and sports is a daily endeavor of the morning coffee crowd—along with medical prognoses. What are the tenets of good forecasting?
1) Employ all 3 schools of forecasting, fundamental, technical and flow.
2) Be very numeric (gamblers by trade are usually good because they see the world in probabilities and are always suspicious of experts and certainty).
3) Change your mind when the facts change. Remember, every bull and bear market contains the seeds of its destruction. Trees do not grow to the sky, and commodities never go to zero.
4) Fall in love with your spouse and children, not your position or yesterday’s view.
5) Be able to recognize the difference of a move along the price curve from a shift of the curve (usually technology, politically or demographically induced).
6) Understand the difference between “noise” and a really important game changer.
7) Read subtle signs (a Patriots linebacker once told me that Coach Belichick said not every linebacker can have Lawrence Taylor’s speed or strength, but that reading subtle signs in an offense was the key to being great).
Now using the 3 schools of analysis mentioned earlier, lets relate it to our oil market:
Fundamental: When the oil production in the United States increased, it was easy to see that in an inelastic commodity like oil would fall precipitously. The Iranian and Saudi fight for market share was another fundamental indicator, as well as the industrial and home heating switch to a cheaper Btu in natural gas
Technical: When the Goldman’s of the world were talking about $150 oil and super spikes when the open interest in net longs was at a record length and all the multi-day moving averages were stalling at the $100 level again the arrow pointed down.
Flow: The hardest school of thought to precisely define, but maybe the most important for those in the business. Essentially, it is acquired by being networked and listening. Super forecaster Peter Lynch said his most profitable trade was Subaru, when he listened at a party and he overhead how many people were buying cars from the new brand. I was fortunate enough to be close to some E&P companies when the amount of oil coming out of the Baaken, Eagle Ford and Marcellus was simply incredible, at a time when gasoline demand was stalling at the pump.
‘Flow” is a reason most banks and financial institutions have proprietary trading desks. Some could call this “inside trading,” but I like to refer to it as having one’s ear to the market (and inside trading is not illegal in commodities). Superforecaster Victor Niederhoffer says he reads several newspapers a day including the National Enquirer, and watches TV to get a feel for market sentiment. The housing talk at cocktail parties was surely part of a market top prior to the great recession.
A cynic trader friend of mine says flow is most important to him, because a lifetime of trading has taught him the market’s function “is to screw as many people as it can at any given time.” While too cynical and pessimistic, there is a seed of truth here that more positively put says euphoria is the time to sell and despondence is the time to buy. Technicians call this blow out tops, and capitulation and measure by open interest and volume.
Where does that leave us today in oil?
- SUV sales are up, the consumer is buying and production is collapsing in Mexico, Venezuela and Russia.
- Oil prices are stabilizing above their multi-day lows and net longs are being replaced by net shorts.
- Chinese usage is up strongly including demand for barrels to store (they have booked record storage in last 60 days.
The low 30’s were a market bottom and we will be above $50 by year’s end. In North America it is not just new drilling that is down, but production from existing wells is also down as producers understand the ground is the cheapest storage, and oil is worth more on the balance sheet as reserves than cash.
Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. In 2005, he was named President and CEO of Gulf Oil LP and elected to the Gulf Oil LP Board of Directors. In October of 2008 he was named CEO of the now combined Gulf Oil and Cumberland Farms whose annual revenues exceed $11 billion and that now operates in 27 states. In September 2013, Petrowski stepped down as CEO of The Cumberland Gulf Group. He is now managing director of Mercantor Partners, a private equity firm investing in convenience and energy distribution, and a member of the Gulf board.