The document provides an overview and analysis of historical trends in global energy demand and prices over the past several decades. It divides this history into 5 waves: 1) Deregulation from 1983-2004, 2) China's growth from 2004-2008, 3) Financial collapse and fracking from 2008-2009, 4) Decarbonization, digitization and distributed generation from 2009-2013, and 5) Uncertainty from 2013-2015. For each wave it analyzes how oil and natural gas prices changed and their price ratio, showing how factors like new technologies and economic/political events impacted supply and demand dynamics in the energy market over time.
1. 1
WTF, OMG & FML
Seeing the value in chaos
January 28th, 2016
Shaun Connell
2. 2
Agenda
• Content
• Energy Primer – World Energy Demand
• A brief lesson in commodity pricing
• Historical price analysis – The First 5 Waves
• Forward price analysis – The Final 3 Waves - How to profit riding each wave
• Q&A
10. 10
A brief lesson in commodity pricing
How is energy priced and why is this important?
11. 11
Calories – Apples vs. Oranges
• Question: You’re on a tight budget and need to eat. Based on the cost per calorie
for the apple and the orange, which fruit should you purchase?
APPLE
100 Calories
$1.00
$0.01/ Calorie
ORANGE
100 Calories
$1.00
$0.01/ Calorie
• Answer: They both cost the same per calorie – you can choose based on what you
think will taste best.
12. 12
Calories – Apples vs. Oranges
• Question: A hurricane hits the coast of Florida and wipes out this years Orange
crop. The price of Oranges rises to $4.00/Orange. You’re still on a tight budget and
starving for food. Which fruit do you choose to purchase?
APPLE
100 Calories
$1.00
$0.04/ Calorie
ORANGE
100 Calories
$4.00
$0.04/ Calorie
• Answer: Obviously, you purchase the apple. Why pay 4 times more per energy
calorie? However, If money was no object and I loved Apples, I may still buy the
apple.
13. 13
Calories – Oil vs. Natural Gas
• Question: You have a car that can fuel switch between oil (gasoline) or natural gas.
Based on the cost per calorie for each fuel, which do you choose to purchase?
Oil
600 Calories
$6.00
$0.01/ Calorie
NatGas
100 Calories
$1.00
$0.01/ Calorie
• Answer: They both cost the same per calorie. You choose whatever you fancy for
the day.
14. 14
Calories – Oil vs. Natural Gas
• Question: War breaks out in the middle east causing a shortage of oil and a price
spike to $24.00 per barrel. Now which fuel do you choose for your car that has the
ability to fuel switch between oil and natural gas?
Oil
600 Calories
$24.00
$0.04/ Calorie
NatGas
100 Calories
$1.00
$0.01/ Calorie
• Answer: Given oil now costs 4 times more per calorie of energy, you choose to
switch to Natural Gas. Friends of yours that have cars that only run on gasoline are
forced to pay 4 times more than you at the pump. Sucks to be them.
18. 18
Wave 1 - Deregulation
0
5
10
15
20
25
30
35
40
45
50
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
Apr-83
Jan-84
Oct-84
Jul-85
Apr-86
Jan-87
Oct-87
Jul-88
Apr-89
Jan-90
Oct-90
Jul-91
Apr-92
Jan-93
Oct-93
Jul-94
Apr-95
Jan-96
Oct-96
Jul-97
Apr-98
Jan-99
Oct-99
Jul-00
Apr-01
Jan-02
Oct-02
Jul-03
Apr-04
Jan-05
Oct-05
Jul-06
Apr-07
Jan-08
Oct-08
Jul-09
Apr-10
Jan-11
Oct-11
Jul-12
Apr-13
Jan-14
Oct-14
Jul-15
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE 1
Deregulation
• Wave 1 – Deregulation (1983 to 2004)
• Oil started trading in 1983 and averaged $23.06/barrel from 1983 to 2004
• Natural Gas began trading in 1997 and average $3.73 from 1997 to 2004
• From 1997 to 2004, the oil/gas ratio was 7.4
19. 19
Wave 2 - China
0
5
10
15
20
25
30
35
40
45
50
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
Apr-83
Jan-84
Oct-84
Jul-85
Apr-86
Jan-87
Oct-87
Jul-88
Apr-89
Jan-90
Oct-90
Jul-91
Apr-92
Jan-93
Oct-93
Jul-94
Apr-95
Jan-96
Oct-96
Jul-97
Apr-98
Jan-99
Oct-99
Jul-00
Apr-01
Jan-02
Oct-02
Jul-03
Apr-04
Jan-05
Oct-05
Jul-06
Apr-07
Jan-08
Oct-08
Jul-09
Apr-10
Jan-11
Oct-11
Jul-12
Apr-13
Jan-14
Oct-14
Jul-15
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE 2
CHINA
• Wave 2 – China (2004 to 2008)
• China’s energy consumption doubles over 4 years – entry into middle class and
vehicle ownership – surge in demand for gasoline (oil).
• Oil price spikes from $30 in 01/04 to $134.02 in 06/08. Natgas spikes from $6.00
to $13.00 over the same time period.
• The Oil/Gas ratio averages 9X with a peak of 14X in 08/08.
20. 20
Wave 3 – Financial Collapse & Fracking (FC&F)
0
5
10
15
20
25
30
35
40
45
50
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
Apr-83
Jan-84
Oct-84
Jul-85
Apr-86
Jan-87
Oct-87
Jul-88
Apr-89
Jan-90
Oct-90
Jul-91
Apr-92
Jan-93
Oct-93
Jul-94
Apr-95
Jan-96
Oct-96
Jul-97
Apr-98
Jan-99
Oct-99
Jul-00
Apr-01
Jan-02
Oct-02
Jul-03
Apr-04
Jan-05
Oct-05
Jul-06
Apr-07
Jan-08
Oct-08
Jul-09
Apr-10
Jan-11
Oct-11
Jul-12
Apr-13
Jan-14
Oct-14
Jul-15
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE
3
FC&F
• Wave 3 – Financial Collapse (2008 to 2010)
• Demand fell off a cliff – price of oil dropped – it took 8 months to drop from $134
in 06/08 to $39 in 02/09.
• Fracking technology unlocked in the US – MASSIVE supply hits market causing
natural gas prices to trade lower than levels reached at oil bottom.
• This causes the oil/gas ratio to expand to a high of 25X in 09/09.
21. 21
Wave 4 – 3 D’s (Decarbonisation, Digitalization, Distributed Generation)
0
5
10
15
20
25
30
35
40
45
50
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
Apr-83
Jan-84
Oct-84
Jul-85
Apr-86
Jan-87
Oct-87
Jul-88
Apr-89
Jan-90
Oct-90
Jul-91
Apr-92
Jan-93
Oct-93
Jul-94
Apr-95
Jan-96
Oct-96
Jul-97
Apr-98
Jan-99
Oct-99
Jul-00
Apr-01
Jan-02
Oct-02
Jul-03
Apr-04
Jan-05
Oct-05
Jul-06
Apr-07
Jan-08
Oct-08
Jul-09
Apr-10
Jan-11
Oct-11
Jul-12
Apr-13
Jan-14
Oct-14
Jul-15
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE 4
3D’s
• Wave 4 – 3 D’s (2010 to July 2014)
• Climate change is front and centre. Massive amounts of government subsidy’s
pumped into new technologies to reduce GHG’s (i.e. Tesla)
• Oil prices continue to rise with global demand. Natural gas prices continue to
reach all time lows based on technology advances in fracking. This technology
begins to be applied to the “tight oil” plays in the US.
• Oil to gas ration explodes to 53X in 04/12 (Oil = $103.35, NatGas = $1.95)
22. 22
Waves 1 through 4 - Alberta Population and Migration
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
30000
35000 03-01-1983
12-01-1983
09-01-1984
06-01-1985
03-01-1986
12-01-1986
09-01-1987
06-01-1988
03-01-1989
12-01-1989
09-01-1990
06-01-1991
03-01-1992
12-01-1992
09-01-1993
06-01-1994
03-01-1995
12-01-1995
09-01-1996
06-01-1997
03-01-1998
12-01-1998
09-01-1999
06-01-2000
03-01-2001
12-01-2001
09-01-2002
06-01-2003
03-01-2004
12-01-2004
09-01-2005
06-01-2006
03-01-2007
12-01-2007
09-01-2008
06-01-2009
03-01-2010
12-01-2010
09-01-2011
06-01-2012
03-01-2013
12-01-2013
09-01-2014
06-01-2015
NetMigration Int'l Prov'l Population
Wave 1 Wave 2 W
a
v
e
3
Wave 4 Wave 5
• Alberta population will continue to grow – disposable income will decline
• During the oil crisis of the 80’s, Alberta population growth was flat – interest rates
were 18% - people were forced out of home ownership and left the province.
• Today, interest rates are 3% - not likely to squeeze as many home owners.
Disposable income will decrease with lower paying jobs.
• There is a global trend towards urbanization due to wealth opportunities and
energy efficiencies – i.e. Millennials take public transit vs. own vehicles
25. 25
USDCAD vs. Oil – Wave 2 to 4
y = -0.0073x + 1.6103
R² = 0.6928
$1.050
$1.100
$1.150
$1.200
$1.250
$1.300
$1.350
$1.400
$1.450
$27.00 $31.00 $35.00 $39.00 $43.00 $47.00 $51.00 $55.00 $59.00
Scatterplot - Monthly Oil vs. USDCAD
Wave 2 to 4 ($34 < OIL < $61)
• Wave 2 to 4 with Monthly Crude Range ($34 < OIL < $61) - Findings
• Significant R squared value of 69% when selecting crude value range ($34 to $61)
• Two dots in the blue circle represent recent USDCAD high on Jan 21/16 current
USDCAD on Jan 27/16. They are both above the trend line.
• When the price of oil is between $47 and $51, the USD CAD was between $1.19 and
$1.31.
26. 26
Annual Path for USDCAD vs. OIL (2004 – 2015)
37, 1.3008
49, 1.29
y = -0.0044x + 1.4222
R² = 0.6918
0.95
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
30 40 50 60 70 80 90
USDCAD vs. OIL - Annual Averages (2004 - 2015)
• Relatively strong R-squared of 69% - if relationship was to continue to hold, this
would mean that you would sell the USDCAD when its above the line, and buy the
USDCAD when its below.
• The past 3 years have settled “above” the line – which could just be noise, but could
also mean a structural shift in the relationship.
2004
2015
27. 27
Summary – Oil and USDCAD
• Crude oil prices have historically had a strong impact on
the USDCAD
• If you believe that we have seen a bottom in crude prices
and the USDCAD behaves in a manner similar to the
past 10 years, there is a lot of upside to selling the USD
at current levels.
• The table to the right illustrates where the USDCAD
should be worth with oil prices ranging between $25 and
$50. This assumes no structural changes between the
relationship between Oil and FX.
• Wildcards – New Federal Leadership, Interest Rates (US
raising rates, Canada is dropping rates)
28. 28
Forward Price Analysis
Waves 6, 7 and 8
Introducing the final 3 future waves. If they are correct, what surf
board works best in riding the wave?
Historical Waves Date
Wave 1 – Deregulation (D-REG) 1983 – 2004
Wave 2 - China 2004 - 2008
Wave 3 – Financial Collapse and Fracking (FC&M) 2008 – 2009
Wave 4 – Digitization, Distributed Generation, Decarbonization (3D’s) 2009 - 2013
Wave 5 – What the fuck? (WTF) 2013 – 2015
31. 31
Waves 5 through 8 – July 2014 to 2020+
$0.800
$0.900
$1.000
$1.100
$1.200
$1.300
$1.400
$1.500
$25.00
$35.00
$45.00
$55.00
$65.00
$75.00
$85.00
$95.00
$105.00
$115.00 Wave 5
WTF
Wave 6
OMG
Wave 7
FML
Wave 7
Rebirth
Wave 4
3D’s
5 – WTF (07/14-12/15) 6 – OMG (2016) 7 – FML (01/17-06/18) 8 – Rebirth (07/18 ++)
Story Disbelief. This is just
another boom bust cycle.
OMG – the boom may
not happen. What
now?
FML – jobs slashed, fire
sales, panic.
Diversification of Alberta
economy. Shift away
from natural resource
based economy.
Physical
Winners
None – All physical assets
lose value.
Some – Begin to
aggregate heavily
discounted assets. Be
patient – more value to
come.
Buy deeply discounted
physical premium assets
that deliver 15% IRR to
individuals who still have
cash to buy.
Ride your physical
asset winners.
Financial
Winners
Commodity – Sell Oil
FX – Buy USDCAD
Equity – Sell highly
leveraged O&G companies
– emphasis on heavy oil
producers who own USD
debt.
Commodity/FX – Buy
OTM call options on
crude and put options
on USDCAD.
Spread Trades – 1-
Buy CNRL, Sell CVE
Buy Boardwalk, sell
DREAM REIT.
Commodity/FX – Less
value – reality sets in with
crude fair value between
$40 and $50.
Equity – Buy undervalued
AB companies that were
pulled down with market
(i.e. Boardwalk)
Uncertain.