Archive for the ‘Risk Strategy’ Category

1 Aug 12 @ 8:46am by Matt Smith in Random, Risk Strategy, energy consulting, risk management

‘That’s not a motto, that’s just you saying a bunch of things.’

There’s a hilarious line in the film Role Models, where Paul Rudd turns to Seann William Scott and says, exasperated: ‘That’s not a motto, that’s just you saying a bunch of things’. Not only did this make me chuckle, but it struck a chord, as there are many mottos bantered around in financial markets which are, well, just a bunch of things and little else. So this week I thought I would seek inspiration from my work colleagues – my own role models, per se – to provide me with some words of wisdom. Some relate to energy, and some relate to life. But all we can relate to, so enjoy:

‘Without energy there is no capacity to do work.’
- This makes sense in a couple of ways, my learned colleague told me; not only is this the dictionary definition for energy, but without energy, there would be no Summit. He’s got a point (well, two in fact).

‘You may not believe everything that is said, but if you look hard enough, and take the emotion out of it, you might see some truth worth hearing.’
- This is a message we try to get across to clients; even if you don’t believe us, we are here to tell you the stark truths.

‘Change will come when the pain of staying the same is worse than the pain of change.”
- Again, at some point, clients realize it is wrong to fear change, especially when maintaining the status quo involves the pain of losing money.

‘You can’t always get what you want…but when you try sometimes, you get what you need.’
- This is something our CFO tells (sings?) to his kids, but it relates just as well to hedging strategies; you may not get what you want (= the lowest price), but you get what you need (= budget certainty).

‘You know what you get when you don’t get what you want…experience.’
- And the flip-side of not hedging; if the market turns against you, you gain the experience of why hedging makes sense.

Five further mottos for life:
–’Never mistake activity for achievement.’
–’Never celebrate mediocrity.’
–’No one said life is easy.’
–’You get what you get and you don’t throw a fit.’
–’I will not idly tiptoe through life only to arrive safely at death’s doorstep.’

Thanks so much to this week’s role models…Ann Barzak, Deena Burnett, Evan Cox, George Willett, Joe Higgins, Joyce Gee, Michelle Kerbow, Phil Wafford, Roger Durham, Tom Muddell.

I leave you with two mottos from our CEO, Steve Wilhite (it’s great he humors my occasional whims…), one for work and one for life:

‘Most people fail to plan, not plan to fail…but failing to plan is like planning to fail.’

‘Work then play, work then play, work then play – if you do that, the work is better and so is the play.’

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0 Jul 30 @ 7:56am by Matt Smith in Crude Oil, Economy, Natural Gas, Risk Strategy, risk management

Keep Calm and Carry On

The phrase ‘Keep Calm and Carry On’ originated from a planned  poster campaign by the UK Government to drive on the ’stiff upper lip’ mentality of the British public as they faced the onset of World War II.  Although this poster was never officially released, it became popular after copies were discovered in a shop in the north of England about ten years ago.

This phrase has resonated with me recently, as financial markets continue to tread water and trade sideways, as the outlook for the global economy remains somewhat mottled. We have had our recession, and we have experienced some semblance of a recovery. But now we are at a fork in the road; from hereon out we may experience a double-dip in the global economy (top of the pops on google search), we may see economic growth gather pace, or we may see the global economy stall and stumble along a path inbetwixt a recovery and a recession.

So it is no surprise given this backdrop that we see sideways action in our dearly beloved commodities. After crude pre-empted a global recovery last year by more than doubling between January and June, prices have traded within a broad range ever since, as prices await the next signal that global oil demand will continue to increase by virtue of a clearly strengthening global economy – both in developing and developed countries:

US natural gas prompt prices have followed a similar sideways pattern, despite having a different set of influences at work. Being both a domestic market, and a radically-changing one at that, prices have remained subdued yet supported as market participants await further clarity on future supply from game-changing sources (i.e., unconventional supplies) and technology. All the while, prices look for further improvement in future demand by virtue of improving economic growth: 

 So, in this current state of flux, the best thing we can do (as well as being in constant dialogue with an energy consultant, of course) is to keep our heads, and wait for the dust to settle, realizing that commodity prices can turn on their heads at any time. Yet all the while, remembering the mantra…to keep calm and carry on.

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0 Jun 18 @ 9:57am by Matt Smith in Biofuels, Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, Random, Risk Strategy, Technology, UK natural gas, energy consulting, risk management

An Energy Perspective

This post isn’t a post – it’s a link to a guest post out on the Houston Chronicle. The guest post is pilfered, cribbed and cropped from a speech I did in London this week for the shindig at Shakespeare’s Globe to launch our UK office. It basically outlines who is going to win the World Cup, through comparing and contrasting various aspects of the energy complex to eight teams. So please click on the below image to be directed away from this imposter, to the real post:

No burrito bites this week – apologies – I will double down on the delicacies next week. Have a splendid weekend!

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2 May 20 @ 10:35am by Matt Smith in Economy, Global Energy, Risk Strategy, energy consulting, risk management

Commodityspeak Through the Medium of Shakespeare.

To tie in with the shindig that is the launch party of our UK office at Shakespeare’s Globe Theatre on June 15th, I present to thee forthwith ten quotes Billy the Bard would say if he were involved in commodity risk management:

1) There is nothing either good or bad; but thinking makes it so – yes, markets are driven by various forces passing the parcel, from fundamentals to technical analysis to outside influences. But sentiment, opinion and fear/greed also play a starring role. So even if something is not in bad shape, if the consensus makes it so, then prices will reflect this.

2) Measure for Measure – a measured approach to mitigating risk is the way forward, and ties directly to my haiku on risk management: uncertainty is…..an ever-present threat so….hedge hedge hedge hedge hedge.

3) Chaos is come again – Othello knew where it was at…crude down 23% in 13 unlucky trading days, from top of the pops (high of the year $87.15 on May 3rd) to the drop of all drops ($66.91 today – May 20th).

4) Better three hours too soon than a minute too late – hedging is not about picking the bottom of the market, it is about mitigating risk.

5) Though this be madness, yet there is method in’t – why it makes sense to quantify risk in commodity markets. Although no-one can perfectly predict the future, by equipping yourself with a Batman-like utility belt of tools for assessing the potential evolution and volatility of a market – from macroeconomic or econometric models to Value-at-Risk to technical analysis – you can establish parameters to quantify present and future risk and reward.

6) Foregone conclusion – Pah! Shazbat! Unlike in Othello, there is no foregone conclusion in commodity markets. Which is probably a good thing too, as there would be no need for an energy consultant (= Unhooray!).

7) Screw your courage to the sticking-place, and we’ll not fail – having the knowledge to stand by your convictions on market opinions is key. And then develop, evolve, and expand on this opinion by using research, analysis, facts, and cement.

8) The winter of our discontent – no thank you, we have already been through this – no need for a sequel.

9) When shall we three meet again? – the witches from Macbeth are always good for a quote, even without mentioning hubbling and bubbling, toil and troubling. There’s many clichés to describe this – a rising tide lifts all boats, in times of crises all markets correlate, etc, etc, – the point is, following commodities is about monitoring all assets – be it equities, bonds or currencies, as they all influence each other, and can provide insight into the short-term movement in another.

10) By the pricking of my thumb, something wicked this way comes – two words for you – hurricane season. This year is predicted to be one of the most active seasons for years based on some key factors. That said, some say a trained chimp can predict hurricanes better than NOAA.

If you wish to attend the UK event, please click on the ‘Much Ado..’ picture at the top of the post.

I bid thee farewell.

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2 Mar 25 @ 9:50am by Matt Smith in Biofuels, Capital Markets, Crude Oil, Global Energy, Natural Gas, Risk Strategy, energy consulting, risk management

Ten reasons why energy commodities absolutely rock

My name is Matt Smith and I am a financial market junkie. Having left London and the warm bosom of investment management some 1,312 days ago, all could have gone very wrong. However, I have fallen into the arms of another – the world of energy commodities. So henceforth, my reasons for their stardom is tenfold:

1. Markets are all interlinked. Although some energy commodities may spend some time way out in left field, led by their own own fundamentals (step up to the plate, US natural gas), energy commodities take their lead at various times from other commodities, or other asset classes. So the more you know about general markets, the more you can apply that knowledge to the movement in specific commodities.

2. The word fungible. Commodities have fungibility, which means their units can be substituted for another – they are interchangeable, like a dime. Hence why a pipeline attack in Nigeria or geopolitical tension in the Middle East  matters to the price of your gas at the local gas station. It is also a fantastic word.

3. How commodities latch onto other commodities at various times. For example, European power markets pick and choose which price driver to follow, seemingly like picking a jelly belly from a bag (exaggeration for embellishment). At various times, power is led by coal, natural gas, oil or carbon permits, or varying combinations of these four. It keeps you on your toes.

  1. 4. The global reach of commodities. Trying to get your head around a domestic commodity like US natural gas is hard enough, let alone trying to determine how rampant Chinese oil demand weighs in with weak US oil refinery margins to influence UK Brent crude pricing. It surely can never be wholly mastered, but it sure is fun trying to decipher all these contrasting factors, from Corpus Christi to China, via Chiswell Street.
  2. 5. While leading participants in other markets try to hide their misdemeanors through a charade of smoke and mirrors (step up, Lehman Brothers and your Repo 105’s), the largest and most influential participant in the crude complex (Opec) continue to defy their own mandates (official quotas), while fully aware they will be called out on such dissention on a monthly basis. Refreshing.

6. How can you tire of a commodity such as US natural gas, when despite having all the sophisticated financial modeling and valuation tools in the world, prices remain at the mercy of the gods with hurricanes, heat, storms, and snow?

7. Technological advancement. Energy markets are constantly evolving through technological breakthroughs, and this will only continue through developments in such areas as LNG, smart grids, biofuels and green energy.

8. Forward curves. Not only do you have the ability to analyze commodities on the cash market or the front month contract, but you get to analyze the movements of the whole forward curve, going out for years to come. They are like a 3-D version of equities. And the forward curve is just as important as the prompt (or more) to energy risk management.

9. How markets in completely different geographical areas influence each other. Case in point, UK and US prompt natural gas prices have recently converged, due to their increased competition for LNG supplies. Fungibility + transportation links = an ever shrinking world.

10. Commodity markets are like equity markets are like bond markets are like currency markets. No matter how much you analyze a market, you will never master it. But we keep trying our darndest. And that’s why they rock.

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