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Energy & Commodities

Game theory perfectly explains why OPEC members are going to cheat

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Posted by Businessinsider.com

on Wednesday, 28 March 2018 06:28

 

Game theory postulates that rising oil prices increases the payoff for OPEC members to cheat on their deal. Game Theory is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers" and is mainly used in economics - R. Zurrer for Money Talks 

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  • OPEC members have a deal to cap production levels until December.
  • Oil prices are rising. 
  • When prices are higher, there is less incentive to cooperate with production caps. 

With oil prices rising, Organization of Petroleum Exporting Countries members are facing a dilemma.

Extending output caps means making more room in the market for non-member competitors, and coordinating a higher amount of output means lowering prices. So they might not do either, and game theory could help explain why. 

"Game theory suggests that higher oil prices increase the pay-off from cheating on the deal, which means that compliance could fall in 2018," Thomas Pugh and Liam Peach, economists at Capital Economics, wrote in a note to clients this week. 

West Texas Intermediate crude oil has stayed above $60 a barrel most of this year, only falling during a major market selloff in February. And as prices rise, non-OPEC production is increasing. In November, US shale producers hit a record high for production, pumping more than 10 billion barrels a day.  

For an individual country focused on maximizing revenue, producing as much oil as possible is usually the dominant strategy — what players should do regardless of the actions of other players.

But when everyone amps up production, it puts downward pressure on prices. In game theory, this is an example of the prisoner's dilemma. Because everyone acts out of self-interest, players end up in a worse scenario than if they collaborated. 

This is where OPEC collusion comes in. Member countries — Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia and the United Arab Emirates — act as a single supplier. 

But as prices rise, it creates more incentive for members to cheat and produce more. Because marginal revenue is higher than at lower prices, there is greater payoff from raising output — even in the face of production caps. 

At the same time, the opportunity cost of complying also becomes greater. 

"Cutting output to counter the effect of rising non-OPEC production would require giving up increasing amounts of market share and revenue," Pugh and Peach added. 

....also from Business Insider: Trump wants to go after Amazon

 



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Energy & Commodities

Cracks Now Appearing In The World's Major Oil Industry

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Posted by Steve St. Angelo - SRSRocco Report

on Monday, 26 March 2018 06:10

Oil companies that have been around for more than half of a century going bankrupt? With the sell-off in the Stock Markets & the negative issues plaguing the U.S. shale energy industry spreading to the Oil Majors, Steve St. Angelo makes the case it’s just a matter of time before they do  - R. Zurrer for Money Talks

As the sell-off in the broader stock markets intensifies, it will be bad news for the world’s largest oil companies.  Why?  Because cracks are already beginning to appear in the biggest and most profitable global oil companies.  While rising costs and higher debt levels have been plaguing the U.S. shale oil industry, these negative factors are now impacting the major oil companies as well.

When the oil price fell below $100 in 2014, it spelled doom for the U.S. and global oil industry.  As oil prices continued to decline, energy companies were forced to increase their debt and reduce their capital expenditures (CAPEX).  Cutting CAPEX spending while adding debt aren’t a good recipe for positive financial earning in the future.

According to several energy analysts, they believe 2018 will be a turnaround year for the major oil companies.  Unfortunately, the fate of the price of petroleum and the oil companies are tied to the broader markets.  When the markets rise, it’s good for the oil price and energy companies, and when the markets fall, then the opposite is true.  However, the next major market selloff will likely cause irreversible damage to the global oil industry.

Investors need to realize that the global oil industry required $120+ oil in 2013 to replace reserves and bring on more oil production.  When that price level was not obtained that year, oil companies began to cut CAPEX spending even before the price fell below $100 a barrel in 2014.  Today, with the price of oil trading at $64, it is approximately half of what the global oil industry requires to fund new production growth.

So, there lies the rub.  Even though oil companies are more profitable currently, it was achieved by destroying future production.  As we can see in the chart below, CAPEX spending in eight of the largest global oil companies fell 56% from $245 billion in 2013 to $109 billion in 2017:

majoroilcapex

Yes, it’s true that a lower oil price forces oil companies to cut CAPEX spending to remain profitable, but it will also negatively impact their earnings in the future.  While all the major oil companies cut their CAPEX spending significantly over the past four years, Brazil’s Petrobras and ConocoPhillips both reduced it the most by 70%.

Now, to offset the falling oil price, many of the oil companies resorted to adding more debt to pay shareholder dividends or to fund CAPEX spending (or both).  For example, Shell’s long-term debt increased from $36 billion in 2013 to $74 billion in 2017 while ExxonMobil, one of the most profitable major oil companies in the world, saw its debt increase significantly from $7 billion to $24 billion during the same period:



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Energy & Commodities

A Short Term Look at Gold, Crude & Treasuries

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Posted by Rod David -

on Friday, 23 March 2018 06:18

With markets whipping back and forth this extreme volatility has generated unusual trading opportunities. Anticipating imminent price action in each of the markets examined below will refine entry/exit points & protect capital for long term investors, or generate short term trading profits. This analysis was gernerated mid-day March 22nd - R. Zurrer for Money Talks

scGold Apr Contract ( jUN ,  ETF: (GLD))
Rallying ahead of Wednesday's FOMC news and extending sharply higher after it as nonetheless retraced to test 1325.50 at Thursday's low. At least closing back under it was needed to reinstate the downside momentum. Now closing back under 1319.00 is the nearest signal.

Eurodollar Mar Contract (EC, ETF: (FXE, UUP))
Holding Wednesday's bounce at the 1.2390-1.2410 bounce limit didn't prevent probing higher overnight to test 1.2465. But that excess had disappeared by Thursday's open, which extended back down intraday to 1.2365. Closing any lower would confirm the corrective bounce had ended, so long as 1.2390-1.2410continues to hold as resistance.

Silver May Contract (SI, ETF: (SLV))
Probing sharply higher into and out of and after Wednesday's FOM events was retraced back down Thursday to test 16.40 down to 16.33. Just closing under 16.55 prevents launching a new upleg, and allows another close under 16.40 to resume the decline.

30-year Treasury Jun Contract (US, ETF: (TLT))
Ending Wednesday's volatility at 143-16 continued to prevent sellers from gaining traction for their third consecutive daily effort. Gapping up more than 1 point Thursday through Monday's 144-20 close was the consequence. It extended to probe last week's 145-06 highs intraday, but the resistance held. Its reaction down to "lower prior highs" at 144-22 also held. Closing beyond either end of that range is likely to extend in that direction.

Crude Oil Apr Contract (CL, ETF: (USO, USL) (UWTI-long, DWTI-short))
Confirming Tuesday's breakout Wednesday now requires at least an eventual third higher close. Meanwhile, testing 65.00 created potential for reacting down. The 64.25 pullback limit was tested, with room down to 62.70 before undermining the near-term likelihood of resuming the rally to 66.85.

Natural Gas May Contract (NG, ETF: (UNG, UNL))
Wednesday's reversal extended down slightly deeper Thursday. The behavior can't yet be considered "ineffectual optimism" for approaching its 2.62 target with such a slow pace, but it doesn't contradict the ongoing likelihood for breaking through it by at least a dime.

About the Author

Rod David develops analytical techniques that are designed to efficiently identify targets and turning points for any liquid stock or market in any time frame. He primarily analyzes S&Ps, generating several round-turn candidates daily. Rod publishes "Trading Plan" and more each session at the blog http://IfThenSignals.com



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Energy & Commodities

A Nightmare Scenario for OPEC

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Posted by OilPrice.com

on Monday, 12 March 2018 07:54

The International Energy Agency (IEA) sees demand for OPEC oil actually declining in absolute terms over the next few years as it is edged out of the market by an explosion of shale output in the US  - Robert Zurrer for Money Talks

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The US will supply much of the world’s additional oil for the next few years, according to a new report from the International Energy Agency (IEA).

Over the next three years, the US will cover 80 percent of the world’s demand growth, the IEA says in its newly-released Oil 2018 annual report. Canada, Brazil, and Norway will cover the remainder, leaving no room for more OPEC supply.

The irony is that the substantial gains in output from shale will only be possible because of the OPEC cuts, which has tightened the market and boosted prices. This fact is not lost on OPEC producers. "If you are a shale oil producer, who brought you back? It was OPEC," the UAE’s oil minister Suhail Al Mazrouei, said at a recent industry conference, according to Bloomberg. "Without OPEC there’d be chaos in the market."



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Energy & Commodities

How Global Growth and Infrastructure Are Driving Commodities

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Posted by Financial Sense

on Thursday, 01 March 2018 06:09

"For the first time in a decade, we are looking at across the board global growth in both developed and developing economies, setting up tremendous demand for commodities". In another on the theme of on incoming bull market in commodities (see Jack Crooks brilliant forecast), that comment above is proven with argument and facts by Richard Mills in this article. Another well worth ingesting - Robert Zurrer For Money Talks

The global economy is booming again after years in the doldrums, commodities are back in a big way, and metals prices are for the most part, way up.

In our last article showing how commodities are the place to be in 2018, we looked at five drivers: inflation, the low dollar, economic growth, the relative undervalue of commodities versus other sectors, and tightness of supply. This article expands on the economic growth argument and explains how commodity prices are being moved by a bevy of infrastructure projects around the world – all demanding “yuge”, as Donald Trump would say, amounts of metals.

But we'll also talk about how insecurity of supply has created a climate of uncertainty around commodities, fuelled by increasing trade tensions that could lead to tariffs and quotas, driving up the prices of some imported metals – further exacerbating supply-demand imbalances. The US is finally starting to get that it must reduce its reliance on foreign metal suppliers, which is great for domestic exploration and mining. But first, let's talk about global growth and what it means for commodities.

Three-Quarters of the World Is Growing

A year ago the global economy was stagnant following the recession of 2007-09, an overhang from the debt crisis in Europe, and slowing Chinese growth which had seen double-digit GDP numbers throughout the 2000s. According to the International Monetary Fund, 75% of the world is now enjoying a full recovery. The IMF predicts global growth to hit 3.7% this year, the fastest rate since 2010.

The World Bank says it’s the first year since the financial crisis that the global economy will operate at or near capacity. Emerging markets will see the lion’s share of growth, 4.5%, while advanced economies including the US, Japan, and the EU will grow at 2.2%. China is expected to grow between 6 and 7%. India, Ghana, Ethiopia and the Philippines will grow more than China, and eight of the 10 fastest-growing countries this year are likely to be in Africa, according to consulting firm PwC.

Goldman Sachs was quoted saying that “rising commodity prices will create a virtuous circle, improving the balance sheets of producers and lenders, and expanding credit in emerging markets that will, in turn, reinforce global economic growth.”

At the end of 2017 the Bloomberg Commodity Index, which measures returns on 22 raw materials, had the longest rally on record dating back 27 years to 1991.

01-bloomberg-commodity-index

 

.....continue reading and viewing charts HERE



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