Could the oil markets die? How to play them.
Systems analysis 101: Consider all possibilities, however remote.
Fact #1: People don’t understand markets.
It pains me to say this, but few people understand markets. It’s because they see markets as things that go up and down, rather then what they are. Systems.
This article in Oilprice summarizes it well.
Fact #2: Trade, like war is about flows.
The old adage is war is about logistics… movements of stuff. Trade is the same.
An old farmer friend once answered, when I asked him if he sold corn on the NYMEX, “I don’t have a way to get it to the Mississippi river.
Fact #3: Market hubs are local.
Cushing, the largest oil hub in the world, holds 2 days of US oil supply. Most hubs, especially in natural gas are very small. In the US, a hub near Massachusetts might have gas 4X more expensive than Henry Hub which is in Erath Louisiana.
Markets freeze when flows freeze.
If you read the article above, flows have changed in the oil markets. These are simply product flows but they have caused a ripple effect across dozens of industries and hundreds, perhaps thousands of companies.
What has also changed are money flows, and these are equally, perhaps even more important.
Across the world, especially in the third world, dollars are becoming rare and countries are doing something they haven’t done since the 80’s. Limit dollar repatriation.
Product and money flow are the essence of systems engineering.
In systems engineering, we look at a wide range of factors and locations to see when we could hit a freeze. They include…
- Countries that cannot borrow in dollars.
- Countries with a history of non-payment of debts.
- Regional product bottlenecks like the Strait of Hormuz or the Suez Canal.
- Regional disasters such as LPG terminal fires, earthquakes, etc.
- Wars
And finally, intercompany money issues.
For example, in the US, extreme volatility in natural gas prices has caused NG companies to stop or limit drilling. It has also caused them to hoard cash in fear or windfall taxes, interest rate increases and/or the high cost of infrastructure.
In Summary:
As you learn in systems engineering, it is a number of things working in concert that cause systems changes.
We are currently look at the following industries… Mining, Oil and gas, LPG and oil tankers and metal fabrication.
We are not ready to make calls on these businesses but should be in a position to do so by summer.
Landon Fillmore Systems
