Energy

TST Energy Systems

A Visual Collaboration System for Energy Professionals

NOTE:  This page uses TST Oil Prices as an example to explain how TST Energy Systems models and research reports work.  The actual reports are shorter and more comprehensive, precise and dynamic than traditional reports.  You can see an example of how the actual reports look without introductory explanation at TST Oil Prices.

TST Energy Systems is one of many TST Systems for professionals. The system is built on the TST General Purpose Platform described on the TST Home Page. Our products and services are available in 3 main environments: Microsoft.Net for our TST Equities product on the Bloomberg App Store for Bloomberg subscribers; Microsoft Office (Excel, Word, PowerPoint, etc.) for our consulting clients; and Microsoft Cloud (SharePoint) for content management and collaboration.  Our platform is further described on About, Modeling Tools and Platform pages. You can see descriptions of several other other systems products via the Products sub-menus: TST Equities, TST Global Macro, TST Real Estate and TST China.

TST Energy Systems meets the need of energy professionals to make better decisions by systematically – yet intuitively and dynamically – managing the qualitative elements that drive energy prices. TST Energy Systems includes sub-systems for oil, natural gas and electricity.

Site Content – Front End System

EnergySiteContent2

Chevron CEO John Watson sees this need:

We’re paid to figure out oil prices (Video)

“We’re paid to make those predictions” about oil prices — taking into account factors such as politics, foreign exchange rates, the pace of technology and more. However, Watson also expects to see volatility, and he admitted that “getting it wrong is expensive.” To hear what else he had to say about oil prices — including how shale development, spare capacity and changes in demand factor into the predictions — watch his interview with Bloomberg in the video above.  (Houston Business Journal June 15, 2015)

TST Oil Prices Focuses on the Drivers

Many of Watson’s factors are intrinsically qualitative.  Our TST Energy sub-system, TST Oil Prices, enables you to quantify both the qualitative (QL) and the quantitative (QT) factors that Watson considers critical, such as politics and the pace of technology, thus modeling all the drivers of oil prices rather than the QT factors only.  THINKSheet’s value proposition is that it allows decision-makers to include, prioritize and synthesize all the drivers of oil prices, whether they are best communicated numerically or non-numerically, thus increasing the odds of making the right decisions.  We have developed the TST Oil Prices System for our own use in trading oil futures and for customized use by our clients.  We describe the use of the system here from the perspective of our own use.  You are free to use the system, with our support, for your own purposes, which may differ from ours.

Oil Price Drivers Taxonomy

TST Oil Prices is organized based on a drivers taxonomy that enables us to identify and model the few primary factors that drive oil prices at any point in time. The Tier 1 categories are demand, supply, macro, geopolitics, the dollar and financial. The Tier 1 categories have an average of 6 sub-categories in Tier 2, giving a total of 36 sub-categories.  The QT factors include standard data, such as supply & demand, GDP growth rates, foreign exchange rates, and futures activity.  The QL sub-categories include shifts in great power relations, Sunni-Shia relations, new drilling technologies, government stability and regs, risks, competitive forces, terrorism, government and central bank intervention, and news.

TSTOilTaxonomy

TST Oil Prices Model

Our TST Oil Prices Model includes 3 primary models: Fixed Drivers, Dynamic Drivers and Price Forecast.   The Fixed Drivers Model is QT-only and the Dynamic Drivers Model; each generate a separate price forecast, which are then combined in the Price Forecast Model through a set of weights for both models.  We modify these weights based on our opinion of the relative impact of the fixed and dynamic drivers on the price of oil at any point in time.  The Price Forecast Model then generates the overall price forecast.

START PRELIMINARY FORECAST FOR WEDNESDAY TRADE

Fixed Drivers (QT) Model

The Fixed Drivers Model analyzes numerical data, such as supply and demand, GDP growth, interest rates, the dollar, trading trends and trade balances. It generates and automates a price forecast using real-time data from Bloomberg.  The display below shows the most important data from the Fixed Drivers Model.

FixedDriversSummary8162015

The model serves two purposes: it automates a price forecast based on the fixed drivers data and organizes the data in an organized format we use to make our judgments in the Dynamic Drivers Model.

Dynamic Drivers (QL) System – Front End System

Due to THINKSheet’s ability to quantify virtually any type of language, the Dynamic Drivers (QL) Front-End System includes the same types of analytics and visualizations as traditional quantitative systems:

  • models
  • models with multiple views
  • notes
  • bar charts
  • time series charts
  • forecast histories and analysis.

You can see examples of the above in the following sections.

Dynamic Drivers (QL) Model

The  Dynamic Drivers Model provides price forecasts based on our judgments about the 7 most important QL drivers and their interconnections.  We call this model the Dynamic Drivers Model because we can update it immediately to respond to rapidly-changing conditions.  We input the drivers, assign weights, and then make judgments about the relative impact of each driver on the price and the probability of its occurrence.  THINKSheet then generates the price impact of each driver and the overall impact on the price of the full set of drivers.  We can modify all these elements quickly, enabling us to react to and synthesize our judgments about rapidly changing conditions instantly!

DynamicDriversModel8192015

We then use THINKSheet to search for the drivers with the greatest impact on the price.  These are the drivers with the highest weights, greatest impact (Spike or Collapse), highest probability (Virtually Assured or Highly Probable), and greatest divergence from the market consensus within the desired trading horizon (for us, 1 week).

NOTE: Rich language in few words with clear meaning is crucial for the best outcomes.  The language is audience-specific.  Small buy-side teams can use language familiar only to them.  Sell-side analysts with broad audiences must use language easily understandable by the great majority of their audiences.  We provide a set of alternative language and criteria for each Tier 1 category, which you can use to develop the best language for your audiences, both internal and external.

DynamicDriversModel8192015

The model enables us to see the drivers and their impact at a glance.  This enables us to infer the cause and effect of each driver on the price, each other, and the overall price. This includes:

  • the most important drivers
  • why each driver is important
  • precise impact on each driver on the price
  • catalysts that trigger ripple effects & price movements
  • independent & dependent drivers
  • interconnections
  • unintended consequences.

INFERENCE NOTE:  The reasoning, interconnections, causality and unintended consequences are not 100% explicit due to the spatial limitations of the models.  However, viewers generally have a better understanding of complex combinations of QL+QT analysis than numerical models or text.  We provide supplemental documentation that describes the taxonomies, drivers categories, drivers and other information necessary to better understand the model content.

Dynamic Drivers Model With Multiple Views

The Dynamic Drivers Model includes 4 columns that help us make the best judgments for each driver – one metric at a time: Tier 1 Categories, Notes, Expectations and Weeks.  The Tier 1 category column displays the categories for each driver, providing a visual checklist that reminds us to consider all 6 categories before making the final decision; Notes lets us make shorthand notes for each driver; Expectations helps us remember we are comparing our judgments to market expectations; and Weeks helps us make sure the driver will impact the price during our trading horizon.

The standard view hides the 4 columns.  However, we have the option to display them in any combination we want.  E.g., the Tier 1 category view below shows the 6 categories plus a combination category for interconnected drivers that span more than one category.

Tier 1 Category View

DynamicDriversModelCategories8192015

Dynamic Drivers Model + Text Supplement

A unique benefit of THINKSheet models is that they provide highly distilled views in shortcut language of the “Big Picture” of any decision process. We supplement our drivers and notes with textual analysis in progressive levels of detail, ranging from short snippets of text to research reports to highly-detailed research and analysis.  The Dynamic Drivers Analysis below integrates our text snippets with the drivers, model judgments and price impacts.  Seeing the judgments and price impacts while writing the text often leads us to change the judgments and/or the text, which we can do without leaving the Dynamic Drivers AnalysisWe can then refresh the Dynamic Drivers Analysis and see the impact of the changes on the price instantly.

Dynamic Drivers Analysis 

Driver1A8192015

U.S. Auto Sales Crushed Expectations In July. U.S auto sales blew past expectations in July helped by continued demand for trucks and SUVs. The big three — Fiat Chrysler, Ford and General Motors — all reported sales figures that trounced analyst expectations and marked best July since before recession. In July, US auto sales hit a pace of 17.55 million units on a seasonally-adjusted basis, well above expectations for sales to come in at a pace of 17.2 million. Automakers are currently benefiting from the winning combination of an improving economy, lower gas prices and easy credit. They’ve also been running deals to draw buyers onto the car lot and have seen increasing demand for trucks and SUVs, which have a higher margin. @ new car loan now record 67 months (Experian). % of loans with 73 to 84 months new high of 29.5% in Q1, up 25% yoy.
DynamicModelTextRank22 US PRODUCTION DECLINING BELOW 9.4 mbd: EIA weekly report ending 8-7-15. US crude oil (CO) refinery inputs 17.0 mbd, 46,000 bd less wow @ 96.1% capacity. Gasoline production > slightly @ 10.0 mbd. Distillate fuel production > 5.1 mbd. CO imports 7.6 mbd, up 393,000 bpd wow. Over last 4 weeks, CO imports 7.6 mbd, 1.1% below mom. Total motor gasoline imports (including both finished gasoline and gasoline blending components) 683,000 bd. Distillate fuel imports 118,000 bd.  U.S. commercial CO inventories (excluding SPR) < by 1.7 mb wow to 453.6 mb. Total motor gasoline inventories 1.3 million barrels <. Both finished gasoline inventories and blending components inventories <.   Distillate fuel inventories 3.0 mb < and in middle of the average range for this time of year. Propane/propylene inventories   2.4 mb < well above upper limit of   average range. Total commercial petroleum inventories increased by 5.6 mb >.

Driver48192015

Bearish Financial Markets = Lower cash availabiity from capital markets is positive but lower futures by speculators means more risk by change in sentiment. LOWER LONGER is sentiment in capital markets in contrast to positive sentiment in 1H in which $44 billion in equity & debt raised. Also negative environment for repricing reserves in October reset for bank loans + regulators discouraging banks from lending to shale companies due to high risk. Private equity firms have raised $24 billion in ’15 to place in energy firms and their risk tolerance is higher and their time horizon longer. Their terms are far more onerous than banks and capital markets in terms of interest rates, ownerhsip % and covenants. Speculators are reducing net long positions to lowest level in since March.   Contracts totaled a net position of +225,843 contracts for a change of -21,250 contracts wow from +247,093 net contracts wow.

Driver4A8`92015

The eurozone cleared €86 billion ($96 billion) in new bailout loans for Greece on Friday, sending the country a lifeline as it hurtles toward new political instability and a battle among its creditors over how to reduce its hulking debt. Greece needs more significant debt relief from its creditors, the IMF said, after the bankrupt country accepted tough conditions to secure its third bailout deal in five years. The first €26bn of a package worth more than three times that will be disbursed within days after the government in Athens grudgingly approved the agreement at the end of a marathon debate, and Germany backed down on its opposition to rescuing Greece. Christine Lagarde said she will not commit IMF to joining latest bailout until the board has reviewed the agreement, probably in the autumn. Officials said they want to see more details about reforms, particularly to pensions, but the delay will also give European leaders time to consider their stance on debt relief. Germany holds more Greek debt than any other eurozone country and has repeatedly rejected any “haircut” on what Athens owes, but is also keen to keep the IMF involved in the bailout.

Driver58192015

SAUDIs, IRAN, IRAQ > PRODUCTION BUT YEMEN/ISIL RISK: Saudis Production decreased to 10,361 bpd in July from all time high of 10,564 bpd in June. ISIS’ growing presence. Most recent attack on August 6 with suicide bombing on police compound mosque. To further destabilize the country, plausible ISIS will attack oil facilities —   like al Qaeda did in 2006 when it Abqaiq oil processing facility). Iran: 2.8 million mbd now. 3.6 mbd in late 2011 before sanctions. Ability to increase exports depends on current condition of oil fields and infrastructure. Ambition to increase 5 mbd. Iraq: 4.18 mbd July from 4.15 mbd in June (IEA). Record Basra exports of 3.06 mpd, up   40,000 barrels from June.   However, uncertainty re ability to sustain higher export levels, in light of infrastructure constraints in the southern terminals.

Driver62015

The dollar edged higher Thursday, extending its gains from earlier in the session and snapping a six-session losing streak against the euro after a spate of strong U.S. economic data. Goldman Sachs’ strategists forecast substantial gains ahead.   Goldman have reiterated a call for the Dollar to rise 20% in the next three years. Mark Faber: “You have to look at the Chinese currency in the context of all other currencies, Faber told CNBC. “Over the last few years, the yuan has appreciated the dollar and the dollar has appreciated against just about anything in the world; the Chinese currency’s move is relatively small and appears justified.

Driver78192015

GOVT INTERVENING & DEVALUING: YUAN DEVALUATION CHANGES FX LANDSCAPE. China’s leadership is preparing fresh fiscal spending & monetary easing to ensure that signs of economic weakening don’t put their 2015 growth target out of reach, a danger underscored by deterioration in manufacturing in July. Bill Gross: “Weak Chinese economy seems to require a competitive devaluation against other Asian producers which points to weak global growth, lower commodity prices, and again, lower inflation worldwide.” New fiscal spending for infrastructure to keep ’15 growth target; Manufacturing deteriation in July. To finance, > govt debt swap program for local govts to cut borrowing costs; > lending capacity of policy banks Must suspend attempts to rein in leverage. Booming stock market no longer reducing corporate leverage.

 Dynamic Drivers Bar Chart

The bar chart below displays the relative price impact of each of the dynamic drivers.  We can see at a glance that the (1) most important positive drivers are the US Car Sales (demand) and US Production (supply) and (2) the most negative is China Slowdown (macro).

DynamicDriversChart8192015

Dynamic Drivers – Time Series Chart

The time-series line chart below displays the impact on the price of each driver category over time.  We can see at a glance that the financial category has had the most positive impact on the price recently due to the emerging negative sentiment for oil prices in the capital markets, thus reducing the availability and increasing the costof the critical capital flows necessary to pay for new drilling.  The financial category went from  $.60 in March to $1.25 in August for a $1.85 swing.

DynamicTimeSeries8515

Price Forecast (QL+QT) Model

The Price Forecast Model combines the forecasts from the Fixed Drivers Model and the Dynamic Drivers Model.  It displays the price impact of each of the fixed drivers and dynamic drivers. This gives us a complete view of all of the drivers and helps us determine the impact of each driver on the other drivers and on the overall price. We then assign weights to the Fixed Drivers and Dynamic Drivers based on our forward-looking judgments about their relative impact.  THINKSheet then generates the overall price forecast.

PriceForecast8192015

We can see at a glance that the overall forecast is for the price to increase $.67, from $42.72 to $43.39 for 1.58% gain.  We can see the Dynamic Drivers Model forecast of $.67.  The positive drivers are US Car Sales($1.35) and US Production ($1.21) and the most negative driver is China Slowdown (-$1.00).  Our Fixed Drivers Model and its integration with the Dynamic Drivers Model are proprietary and thus not shown.  You can, however, see them in our live demos.

END PRELIMINARY FORECAST FOR WEDNESDAY TRADE

 

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