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consultants ers ectivePresented by : Mr. Biren Vakil
CEO Paradigm commodity,
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Oil market constitutes of consumers roducers hed e funds s eculators
traders,brokers,financers,venturecapitalists,investors,specialtyfunds
like
enhanced
Alpha
and
Beta
specialty
funds,
retail
investors
and
many
Fortheeconomy itislifebloodofeconomicactivity,fortheindustryitisasourceofcreamyprofitsandforinvestorsandspeculatorsitisan
.
Oilpresentsdifferentkindofopportunitiesfordifferentkindofpeopleandentities.Itsattractingallkindofmoney smartmoney,hotmoney,
rtymoneyan goo money. n r canan ormer t sa ac capitalforrogueregimesandformafias.Duetoitsstrategicimportance
corruptionand
oil
and
gas
trade
are
inseparable.
OilMarketisdefinedintofuturesmarket,physicalmarketandstructuredOTCproductmarketandisveryopaqueinnature.
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v
v
EmergenceofalternativeinvestmentmarketslikeETF,ETN,betaspecialty
funds,enhance
Alfa
funds
are
agent
of
change
in
market
structure
.,
moneypowerhasdwarfedconsumerandproducerasapricesetter. With
thehelpofcarrytrade ultracheapfinancing,speculatorshavehijacked
smar e . ommo y u ures ra ea one asgrown rom n n
2002to3trillionin2009.GlobalETFindustryhasgrownto1.1trillionandoilandgasETFinvestmentsizeisnearly$150billion.
GrowthofGasETFmarkethascausedsomemarketturbulenceinUSlast
.goldtrustETFholds1300tongold. Worldsixlargestgoldholder.IfUS
Govt ordertoclosethisfund Goldcouldhalveitsvalue.
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" ", .
issues units that may be purchased and sold on the NYSE Arca.
Currently the ETF industry consist of USD 1.1 trillion.
The oil & gas ETF size is USD 128 billion. exchangetraded fund (ETF), also known as an
exchangetraded product (ETP), are essentially Index Funds that are listed and traded
on exchanges like stocks.
ETF have opened a whole new panorama of investment opportunities to Retail as wellas Institutional Money Managers. They enable investors to gain broad exposure to
relative ease, on a realtime basis and at a lower cost than many other forms of
investing. It as a Mutual Fund that you can buy and sell in realtime at a price that
chan es throu hout the da .
Example: The United States Oil Fund, LP ("USO") is a domestic exchange traded
security designed
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A type of mutual fund with a portfolio constructed to match or track the
components of a market index, such as the Standard & Poor's 500 Index
(S&P 500). Goldman Sach, Dow Jones AIG, CRB, Rogers International are
popular index funds. Goldman Sachs is energy centric fund while CRB and
Rogers international are more balanced funds.
,
operating expenses and low portfolio turnover.
Investing in an index fund is a form of passive investing. The primary
a vantage to suc a strategy s t e ower management expense rat o on
an index fund. Technically speaking index funds are long only funds i.e.
these funds always buy an asset. They cannot short an asset. Hedge fundscan buy or short sell the asset.
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NYMEXislargestexchangeandwidelywatchedasabenchmark
.
MCX theIndianEnergyExchangehasovertookTOCOMinGastrading
andis
third
largest
Gas
trading
exchange
in
the
world.
MCX
terminals
are
nowpresentinfarflunginthecountryandanybodycantrade oilandgas
onMCX.Thesecontractsaremirrorima eofNYcontracts.
Singaporeis
the
hub
of
physical
oil
market.
Besides
Platt's
oil
gram
acompanypromote y c raw so er ng e g ngp at orm. not er
suchpricefacilitatorisArgus.Boththesecompaniesareusefulservice
providersforOSPbenchmarkingtomakelongtermcontracts.
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row
Income
Price elasticity of demand
ea er s oc s
Forward curves shape
Size of speculative positions in
Price elasticity of supply
Role of reserves
the futures market
Traders sentiments
Spare Capacity
Noise Traders
market Exchange Rate fluctuations
Inventories
Wars & other Geopolitical
conditions
e nery s u owns, even r s
Energy security and resource
hunt
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ThePLATTSMARKETONCLOSE
(MOC)
A pricediscovery system designed to yield a price assessment reflective of
market values at the close of the typical trading day.
The MOC pricing system recognizes as a core principle that price is afunction of time and MOC enables Platt to have full clarity on the price at
the close of business.
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In a reallife example, a gasoline seller might believe the market value of.
seller X and the buyer Y. Platt seeks to gauge the true value of gasoline.
, ./gal) and Y might bid to buy at 152.75 cts /gal.
X and Y communicate their bids/offers to a Platts market editor.Communication ma be via an instant messa e to a Platts marketreporter, who inputs the information internally ,or via Platts electronicwindow communication tool enabling market participants to input datadirectly. In either instance, the information is delivered back to themar e a arge n rea me roug e a s o a er e ec ron c
service. Platt at this stage can assess market value between 152.75 and 154.25 cts
.
X and Y can change the price at which they are bidding and offering bysmall reasonable increments, and each of these price changes is publishedon the real
time screen as a rice alert headline.
As offers and bids become sharper, as in any negotiation, the strength ofeach party will determine who acts first, both knowing that other marketparticipants could intervene with a bid or an offer.
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.budge, and X may eventually sell at 152.75 cts /gal.
This process gives a very detailed information trail to Platt's, and theassessment derived from it is not an o inion that X is ri ht or that Y isright, but a reflection of the fact that either party would be expected tocomplete a transaction if its counterparty or another market participant
met a bid or an offer. It is possible that both parties may not trade at all but only remain bidding
152.75 cts/gal and offering at 153.00 cts /gal, in which case theassessment will consider the bid and offer in its assessment process and
.
It is important to note that Platts has very strict systems and disregardsmarket gapping activity in its assessments.
, , ,by lifting high and unreasonable offers or selling into low andunreasonable bids, such activity would be disregarded. In these cases, the
transactions would be ignored and the assessment would take intoaccount t e ast re evant i an o er, wit an e itoria assessment ma eof value, but the last trade would not be considered to be of value.
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Argus uses markets implied value for the North Sea Dated price reference
obtained by cross referencing forward trade, CFD trade and physical
period.
The building block from which the North Sea Dated assessment is derivedis called the flat rice or forward rice. It is the rice for Brent crude
for loading in one (or possibly two) months time. Argus assess prices for 12 pipelines crude markets, based on amethodology that includes deals done through out the entire trading day.
It trades on a barrel perday basis because oil moves all day, everyday.This is why the logic of the marketonclose window methodology
escapes most producers and refiners, and why so many of them now rely.
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Energy markets becoming increasingly volatile due to
ultra loose monitory policy and expansive fiscal policies.,money managers are chasing oil and commodities insearch of hi her returns.
Sovereign debt crisis of Europe and Debt monetizationby US, UK and Japan is also encouraging capital flowsinto resources. The liquidity overhang has an era of
Dynamic Dislocation. Hence, price overshooting orun ers oo ng wou ecome a ru e ra er an anexception. Volatility is here to stay and industry has to
.
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enomena r se o a ternat ve nvestment
markets (AIM) i.e., hedge funds, ETFs andIndex Funds are new kids on the block.
Normall rice setters can be either a
producer or a consumer, but as resourcesare now financial commodities ricesetters are banks and speculators.
.normal.
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orecast ng- tr c y us ness r un ur y o o man ac s ma e o orecas ng a
tricky job, good for consultants, bad for banks/hedgersand u l for the industr which is not interested in shortterm price volatility but interested in long terminvestments and build business.)
ur ng ast year o as a en rom to anbounced back to 85. Robust demand from Asia andemer in economies and demand destruction in OECDare counter cyclical forces and act as a tug of war.
Macro demand trend suggests long term trend is up, butn t e me um term pr ce may tra e etween -
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.. There is no fundamental or technical
reason that oil sta s within a $60-$80band. But that way Wall Street cant make
.
Emergence of Algo Trading, hunger forsuper normal pro its and availability o
ultra leverage trading tools propelsvolatility.
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.. nergy pro ects are u up w t
years of horizon, but volatility has reducedplanning, management and financing intodiserror.
Herd forecasting by consultants has addedwoes and conflictin theories like Su erSpike Theory by Goldman Sachs (2005)
Bank (2008) just confused market
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Gas remains nasty and sexy commodity - nasty
for unsuccessful and sexy for successful. During last 20 years, it often spiked from $2 to
$15.
Since weather is key driver and advent of GasETF h h n h mi r n m rdynamics of trade and industry.
,name of the game in Gas futures market.
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.. torage g ut, presence o n ex an ong on y
funds ETFs, Option Trading and flowed carry
commodity.
,normal arbitrage opportunity
,tango soared to 100% annualized
sometimes behaves inversely to the oil.
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a s o a e ec no ogy, arge un appe
reserves and perceived supply glut suggest a
count points a different picture. Gas has strongly outperformed Oil and storage
build up shows extra supply is being eaten out. During 2005 peak of $12, rig count of Gas, .
This may lead to a supply shock if new
makes drilling less attractive
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There are two basic schools Qualitative and
Quantitative.
ua a ve approac nc u es ec n ca na ys s,Behavioral psychology, market research and Subjective
, ,
Quantitative approach includes Statistics, generical orithms black box tradin and automated s stems.
Another late emergent is mix of both, using chaos and
viewless trading. We believe- a mix approach and eventdriven approach is good for long term success inforecasting.
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- s rony a orecas ng ar y wor s w en s
necessary and when it works it is hardly a necessity.
.hit 145 and everybody was talking 200 but it fell to 35.When It fell below 50, forecaster started calling for 30 oreven ower. uc n o er menta ty amages ongterm planning, market efficiency and had not benefitedeo le at lar e.
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Oil & Gas production cost varies from country to
country and operator to operator. However, path of least resistance is seen to the
upside due to robust consumption in Asia, Aging
infrastructure & underinvestment in Europe, andprobable peak in US & Europe may lead to asupply shock when Global recession is over.
W li v NY WTI il m hi 1 - 12 nGas may hit $10 in 2011-2013.