Global Futures Forum


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Presentation in London at Global Futures Forum event on Human and Natural Resource Scarcity: systemic lessons to learn from the global crisis.

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Global Futures Forum

  1. 1. Market 3.0 Transition through Gas Chris Cook15 May 2012
  2. 2. Market 3.0Market 1.0 – decentralised but disconnected; physical market presence; Money 1.0 was a physical objectMarket 2.0 – centralised but connected; market presence by middlemen; Money 2.0 is a credit objectMarket 3.0 - decentralised but connected; network market presence; Money 3.0 will be a relationship
  3. 3. October 2008 - R.I.P. Market 2.0Peak CreditCollapse of Lehman BrothersQE necessary to prevent debt deflationSystemic and persistent solvency problemCredit intermediary banks systemically short of capital
  4. 4. Adjacent PossibleExchange Traded Funds and Index FundsQuasi-equity ownership claim not debt claimPassive inflation hedger risk averse investors aim to avoid loss rather than make transaction profitMarket risk is dis-intermediated – capital liteIntermediaries retain credit riskProfit from service provision eg HFT, asymmetric info
  5. 5. FinancialisationQE and 0% $ interest rates – buy anything but dollarsCorrelated bubbles caused by inflation hedgersPrice curves cease to reflect market price expectations and reflect $ price expectations ie $ yield curveCommodity prices lose touch with production, consumption & inventoriesEquity prices lose touch with underlying flows of dividends and retained profitsMarket cardiac arrest
  6. 6. Correlated Commodity Bubbles
  7. 7. Market Cardiac Arrest
  8. 8. Oil Markets
  9. 9. Macro Oil Market ManipulationIf producers can support prices they will eg tin, copperSuch Macro manipulation can persist for many yearsEnron-style Prepay contracts eg Chesapeake EnergyProducers lend oil to passive investorsPassive Investors lend $ to producersInvestment Banks intermediate producers & investorsA two tier – false - physical market and Dark InventoryAsymmetric information re inventory is profitable for privileged banks and traders
  10. 10. Bubble 1.0
  11. 11. 2005 to July 2008 – Bubble 1.0BP and Goldman Sachs joined at the head from 1995GS creates Goldman Sachs Commodity Index fundGS invents inflation hedging memePrepay - GSCI lends $ to BP via GSBP lends oil to GSCI via GSBubble spiked in July 2008
  12. 12. July/December 2008 - CollapsePrice falls from $147/bbl to $35/bblSaudis cut production by 1.5m bpdCombination of price fall and production cut = PainOctober 2008 - $ billions of passive fund money flows into funds in response to ZIRP and QESaudis receive an offer they cannot refuse - Prepay
  13. 13. Saudi Oil Production Pain Prepa y
  14. 14. Bubble 2.0
  15. 15. Jan 2009 to March 2011 – Bubble 2.0In or before January 2009 prepay programme beginsMarket goes into super contango and is re-inflatedMarket price pegged for 18 months between $70 & $90Unstable equilibriumMarch 2011 - Libya supply shock & Japan demand shock
  16. 16. Saudi Oil Production Unstable Equilibrium Pain Shocks Prepa y
  17. 17. End Game
  18. 18. March 2011 to Date – End GameMay 2011 - Libya/Japan shock subsidesSeptember 2011 - passive investors pulling outNovember 2011 - Iran risk premium commencesMarch 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 buyersMarket 1.5m to 3m bpd over-suppliedIran risk premium subsidingMay 23rd Meeting in Baghdad
  19. 19. Muppets, Speculators & Shocks Libya Shock What Shock? Iran Shock03/04/10 19
  20. 20. Managed decline or Meltdown?The market is going down as we speakThe risk is a market discontinuityIn 1985 the tin price collapsed from $8,000/tonne to $4,000/tonne overnightWTI risk maybe $50/bbl dropBrent risk maybe $60/bbl dropThis would wipe out speculators, some clearers and disrupt private too big to fail clearing houses
  21. 21. What is the next Adjacent Possible?ETF redeemable in gold recently launchedFund units redeemable in payment for underlying asset reduce liquidity risk and credit riskStock – undated IOU returnable in payment for valuePre-dates modern banking (from 1694)Back to the Future
  22. 22. Next Adjacent PossiblePeer to Asset investmentIntermediaries become capital lite service providersNetworked and resilient market with risk distributed to sellers and buyers collectivelyFlight to Simplicity
  23. 23. Energy DoctrineStability – dis-intermediation reduces volatility and enables long term investmentEquity – fair balance between producers, consumers, service providersHigh Carbon price – investment in renewables and energy savings funded out of shared surplusEnergy 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. 24. Transition through GasGeneric Gas Transaction Registration - GasClearGas Market Framework Agreement/ Clearing UnionGas Market InstrumentGas Market Domain eg Dot GasGlobal Energy Institute – networked public/private institution for joined up R & D and energy policyNow: oil is priced against $ and gas is priced against oilFuture: price dollars and oil in gas