Global Futures Forum
- 1. Market 3.0 Transition through Gas Chris Cook 15 May 2012
- 2. Market 3.0 Market 1.0 – decentralised but disconnected; physical market presence; Money 1.0 was a physical object Market 2.0 – centralised but connected; market presence by middlemen; Money 2.0 is a credit object Market 3.0 - decentralised but connected; network market presence; Money 3.0 will be a relationship
- 3. October 2008 - R.I.P. Market 2.0 Peak Credit Collapse of Lehman Brothers QE necessary to prevent debt deflation Systemic and persistent solvency problem Credit intermediary banks systemically short of capital
- 4. Adjacent Possible Exchange Traded Funds and Index Funds Quasi-equity ownership claim not debt claim Passive 'inflation hedger' risk averse investors aim to avoid loss rather than make transaction profit Market risk is dis-intermediated – 'capital lite' Intermediaries retain credit risk Profit from service provision eg HFT, asymmetric info
- 5. Financialisation QE and 0% $ interest rates – 'buy anything but dollars' Correlated bubbles caused by 'inflation hedgers' Price curves cease to reflect market price expectations and reflect $ price expectations ie $ yield curve Commodity prices lose touch with production, consumption & inventories Equity prices lose touch with underlying flows of dividends and retained profits Market 'cardiac arrest'
- 8. Oil Markets
- 9. Macro Oil Market Manipulation If producers can support prices they will eg tin, copper Such 'Macro' manipulation can persist for many years Enron-style 'Prepay' contracts eg Chesapeake Energy Producers lend oil to passive investors Passive Investors lend $ to producers Investment Banks intermediate producers & investors A two tier – false - physical market and Dark Inventory Asymmetric information re inventory is profitable for privileged banks and traders
- 10. Bubble 1.0
- 11. 2005 to July 2008 – Bubble 1.0 BP and Goldman Sachs joined at the head from 1995 GS creates Goldman Sachs Commodity Index fund GS invents 'inflation hedging' meme Prepay - GSCI lends $ to BP via GS BP lends oil to GSCI via GS Bubble 'spiked' in July 2008
- 12. July/December 2008 - Collapse Price falls from $147/bbl to $35/bbl Saudis cut production by 1.5m bpd Combination of price fall and production cut = Pain October 2008 - $ billions of passive fund money flows into funds in response to ZIRP and QE Saudis receive an offer they cannot refuse - Prepay
- 13. Saudi Oil Production Pain Prepa y
- 14. Bubble 2.0
- 15. Jan 2009 to March 2011 – Bubble 2.0 In or before January 2009 prepay programme begins Market goes into 'super contango' and is re-inflated Market price pegged for 18 months between $70 & $90 Unstable equilibrium March 2011 - Libya supply shock & Japan demand shock
- 16. Saudi Oil Production Unstable Equilibrium Pain Shocks Prepa y
- 17. End Game
- 18. March 2011 to Date – End Game May 2011 - Libya/Japan shock subsides September 2011 - passive investors pulling out November 2011 - Iran risk premium commences March 2012 and May 2012 Saudis deliver 20m bbl to the US – who are awash in oil (inventories @ 20 year high) Prepays result in massive Saudi deliveries to US buyers Market 1.5m to 3m bpd over-supplied Iran risk premium subsiding May 23rd Meeting in Baghdad
- 19. Muppets, Speculators & Shocks Libya Shock What Shock? Iran Shock 03/04/10 19
- 20. Managed decline or Meltdown? The market is going down as we speak The risk is a market discontinuity In 1985 the tin price collapsed from $8,000/tonne to $4,000/tonne overnight WTI risk maybe $50/bbl drop Brent risk maybe $60/bbl drop This would wipe out speculators, some clearers and disrupt private 'too big to fail' clearing houses
- 21. What is the next Adjacent Possible? ETF redeemable in gold recently launched Fund units redeemable in payment for underlying asset reduce liquidity risk and credit risk Stock – undated IOU returnable in payment for value Pre-dates modern banking (from 1694) Back to the Future
- 22. Next Adjacent Possible 'Peer to Asset' investment Intermediaries become 'capital lite' service providers Networked and resilient market with risk distributed to sellers and buyers collectively Flight to Simplicity
- 23. Energy Doctrine Stability – dis-intermediation reduces volatility and enables long term investment Equity – fair balance between producers, consumers, service providers High Carbon price – investment in renewables and energy savings funded out of shared surplus Energy Standard – energy unit of account (not currency) Energy Economics – investment decisions made on the basis of least energy cost rather than least dollar cost
- 24. Transition through Gas Generic Gas Transaction Registration - GasClear Gas Market Framework Agreement/ Clearing Union Gas Market Instrument Gas Market Domain eg Dot Gas Global Energy Institute – networked public/private institution for joined up R & D and energy policy Now: oil is priced against $ and gas is priced against oil Future: price dollars and oil in gas