Sample Scenarios

Sample Scenarios Site Organization

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TST Models 1

WTI Price Forecasts: $60 and $20 Scenarios

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Individual Driver Comparisons

You can compare the drivers side-by-side under the two scenarios.  E.g., you can see that the primary reason for the $40 difference in price is the Impact judgments for China New Cities Fill Rate of $12.75.

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Causation

Correlation is not causation.  This is a common refrain in the financial markets.  TST models enable you to quantify and visualize causation, starting with the drivers and ending with the consequences.  E.g., lower than projected fill rates for China’s new cities could motivate Xi Jinping, the most autocratic Chinese leader since Mao, to seek a rapproachement in US relations with a special emphasis on increasing trade with the US as the only source of new growth for the Chinese economy to increase China & US growth rates and new car sales and thus demand for gasoline and oil.  The aggregate price impact is $9.

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System Overview

Our Algorithmic System is Proprietary

The Fixed Drivers (QT) forecast is one of two main systems in our Oil Price System.  The Fixed Drivers Summary below gives you a sense of how it works; however, we only show the model in live demos because it is proprietary.  However, our experience is that virtually all potential users of TST Oil have their own quantitative models (QT) and, it is the Dynamic Drivers (QL) Models that enable them to do what they can’t do with their existing toolset.

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Dynamic Drivers Model Overview

Our Dynamic Drivers Model focuses on the qualitative drivers. It is judgment-driven, highly dynamic and synthesizes our thought process in the form of a story.  We can change the drivers, weights, impacts and probability judgments in virtual real time and see the change in price for each driver and the overall price instantly.  Sample QL drivers include concepts (Animal Spirits / behavioral finance), trends (globalization / rising middle class), interest groups (Sunni / Shia /Germans / Greeks / Exxon Mobil / Gazprom), new technology (hydraulic fracking) , government regulations Dodd-Frank), photos (Picasso’s Guernica for Spanish Civil War), and government leaders (Xi Jinping, Putin & The Donald).

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Our Specialties

Our team specializes in 3 drivers of WTI prices in which we have specialized expertise: (1) China real estate values, (2) Middle East geopolitics and (3) US shale oil production.  China real estate values impact the Chinese economy, which impacts the global economy,  the macro environment and, ultimately, demand for oil.  Real estate values drive the policies of the China Communist Party (CCP) which has complete control over the economic, business and financial policies of China.   Middle East Geopolitics can instantly impact oil prices due to disruption in the production of the Gulf States, Iran and Iraq which together have 73% of OPEC’s production.  US Shale Oil production has become the swing production.  You can, of course, focus on any drivers you want.

TST Models 2

$60 Scenario

This is our $60 per barrel scenario as embedded in our Dynamic Drivers Model below.  The Model is highly dynamic and we can update it in virtual real time to play “what if” and/or incorporate new events that occur this week.  The detailed logic behind the assumptions follows.

Dynamic Drivers Model

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The forecast is for the price to increase from $45.41 to $60 ($59.56) for an increase of 33%.  2 drivers will spike the WTI price: an attack on the Saudi Arabia or Iraq oil infrastructure and China’s need to speed the fill up speed for its ghost/empty/new cities.  The oil infrastructure attacks will decrease production by approximately 2 million barrels a day in a region that generates 73% of OPEC production.  The need for China to rapidly speed up its new cities will motivate Xi Jinping to do what he can to increase trade with the US to increase China’s GDP and the number of people in the middle class necessary to afford the vast amount of inventory available in the empty cities.  This will result in a new trade agreement between China and the US that will dramatically increase the GDP of both countries and their respective demand for new cars and the gasoline to fuel them.

$20 Scenario

Goldman Sachs released a new $20 a barrel scenario on Friday, September 4th. Below is our $20 scenario.

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The Differentiator

The differentiating judgment is whether the New Cities Fill Rates are very positive or very negative.  The difference in price is $12.75.

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China Real Estate Values

China real estate values are a driver of the Chinese economy and thus the global economy.  We believe that a key driver of China’s real estate values is the speed with which its new cities fill up.  The new cities are also referred to as “ghost cities” and “empty cities” market commentators, such as Jim Chanos and the Wall Street Journal, and have been the subject of broadcasts by 60 Minutes, Al Jazerra and Dateline Australia.  We believe, however, that these reports were misleading.

Wade Shephard is the authoritative source of China’s ghost/empty/new cities.  He provides the most balanced view of the cities in his book “Ghost Cities of China” and his frequent reports on them.  One of his most informative factoids is that Pudong was China’s original ghost city.

Pudong in Shanghai

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“You now look at the Pudong financial district – the place in Shanghai with all the skyscrapers that you see when you look across the Huangpu River from the Bund — and it’s easy to assume that it’s always been there. It is now one of the most iconic sights of China, and its towers form one of the most well known skylines in the world. But if you looked at the same scene 20 years ago you would only see the Oriental Pearl Tower, some warehouses, ramshackle fishing villages, and little else.  Within the lifetime of a university sophomore, Shanghai built one the most vibrant economic zones in the world from scratch. Though the entire process was mocked each step of the way by foreign analysts, economists, and journalists, who snickered at the city as though it were a kid wearing a suite two sizes too large.

Most infamously, in 2001, Milton Friedman, called Pudong a “Potemkin village” and said that the Lujiazui financial district was, “Not a manifestation of the market economy but a statist monument for a dead pharaoh on the level of the pyramids.” A Time magazine editor called it “what-is-wrong-with-this-picture economics.” Pudong was China’s first ghost city.”

Yujaipu – Another Pudong, Wall Street, Rockefeller Center or Ordos?

Yujaipu is an amazing story.  A group of enterprising developers and government officials have engaged in the most extensive and ambitious knock-off in human history: the creation of a Manhattan-themed financial district — in China.  Scheduled for completion in 2019, Yujiapu isn’t just a copy of Manhattan’s Fnancial District. but it is set to be even larger than the original. At 3.86 sq km in area, it is to become the “largest single financial center on the world.” So not only is this a colossal knock off, it’s a colossal development in its own right.

When finished, Yujiapu and the area across the Hai River immediately adjacent to it is slated to provide 15.2 million square meters (164 million square feet) of office space. Though larger in surface area, Yujiapu only intends to offer a little over a third of Manhattan’s business capacity.   Yujiapu is something that has never been done before: the DNA of an entire district of a city has been replicated on the opposite side of the globe. The Atlantic reported that: “The miniature city is a near facsimile of New York–down to the river wrapping around the peninsula’s southern tip.”   Rockefeller Center is being cloned and there is an identical pair of skyscrapers going up that resemble the twin towers of the original World Trade Center.

Amazingly, the Rockefeller Center replica and Yujiapu Twin Towers are being handled by Yinfeini Property, the China subsidiary of Tishman Speyer — the firm that built the original World Trade Center and the new 1 World Trade Center. The Rockefellers’ Rose Rock Group is helping develop Yujiapu’s centerpiece: a 588 meter high tower that will be even taller than 1 WTC, which itself is set to become the tallest building in the western hemisphere. Lincoln Center is helping design Yujiapu’s performing arts center. So not only is Yujiapu being built to resemble Manhattan, it is being built by some of the same firms who made the original.

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Zhengdong

Zhengdong New District is one of the biggest success stories of modern China.  The sheer proportions of this new district are almost incomprehensible: it started as a 150 sq kilometer new development zone but was eventually expanded to encompass 500 sq kilometers — more than three times the size of San Francisco. What’s incredible is that Zhengdong is not even a city in its own right, it’s just one district of Zhengzhou, the 9 million person capital of Henan Province.

Since 60 Minutes and the other networks aired their ghost city report about it, Zhengdong has gained momentum. Zhengzhou’s first metro line went into operation, and was extended out to its CBD in December 2013. This metro line tied the new district together with the old city, which is one of the prime criteria for residents to flood into a fledgling new area. Over 5 million people are expected to live in Zhengdong by 2020. Eventually, Zhengzhou will be connected with neighboring Kaifeng via Zhengdong, creating a 20 million person megacity that will become the economic heartland of central China.

Now a Thriving Metropolis

The picture below isn’t the one 60 Minutes painted.

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Middle East Geopolitics

OPEC Production

Geopolitics has been a huge and increasing threat to the Middle East oil supply since the Iranian revolution in 1979.   The Gulf States, Iran and Iraq produced 73% of OPEC’s oil output as of July.  Any meaningful disruption to this supply would cause a dramatic increase in oil prices since the world’s spare capacity is only around 2 million barrels per day.

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Proximity of Fields & Infrastructure

The maps below illustrate that risk.  As you can see, the production by these countries in concentrated in fields that are in close proximity to each other.  These fields are particularly at risk of sectarian violence due to the conflicts between Saudi Arabia and Iran, Sunnis and Shia, and terrorist groups, such as ISIS, Al Quaeda, and Al Nusra, and government authorities.  The risk to the all-important Saudi oil fields is exacerbated by their location in the Eastern Province of Saudi Arabia whose population is predominantly Shia and systematically repressed by the Sunni royal family that has absolute authority in governing the Kingdom.  This problem is further exacerbated by the Wahabbi view of Islam that considers all Shia as apostates and infidels.

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Threats to Saudi Arabia Oil Infrastructure

There are numerous threats to Saudi Arabia’s oil infrastructure.  They are best captured in this 2013 paper published by the Institute for Gulf Affairs, a Washington, D.C.-based human rights advocacy group and think tank that provides information, analysis and research about the Persian Gulf region and matters of international relations and politics.

Threats to Saudi Oil Infrastructure

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The holy grail for ISIS is the overthrow of the Al Saud family.  It has expanded its attacks and is drawing in new recruits with its radical ideology. ISIS has claimed four significant bombings since May, one of them in neighboring Kuwait.  Last month, a suicide bomber attacked in western Saudi Arabia, hitting a mosque inside a police compound in Abha, 350 miles south of Mecca, killing 15 people in the deadliest attack on the kingdom’s security forces in years. 11 belonged to an elite counterterrorism unit whose tasks include protecting the hajj pilgrimage. And it has rapidly ramped up its rhetoric, aiming to undermine the Al Saud royal family’s legitimacy, which is rooted in part in its claim to implement Shariah law and to be the protectors of Islam’s most sacred sites in Mecca and Medina that are at the center of hajj.

Lori Boghardt, Gulf security analyst at the Washington Institute, said it would not be surprising if IS militants tried to take advantage of the hajj to stage an attack, particularly since the group has encouraged lone wolf operations. This year, the hajj begins Sept. 21 and is expected to draw some 3 million Muslims from around the world.

One problem is that the kingdom’s powerful clerical establishment continues to espouse a hard-line version of Islam, known as Wahhabism, that views Shiites as heretics. ISIS has deftly exploited sectarian conflicts generated by the Saudi-Iranian rivalry, particularly in Syria and Iraq, where it has carried out brutal attacks on Shiites and then portrayed itself as the defender of embattled Sunnis. Many now fear it will pursue a similar strategy in Saudi Arabia.