Streetwise Professor

February 10, 2016

I[gor], Robot (Hater)

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Russia — The Professor @ 9:40 pm

Igor Sechin comes in a close second to Rogozin the Ridiculous in providing Russian comic relief. Perhaps there are others in Russia that excel them, and I am only aware of these two because they have a bigger presence in the West, but both can be relied upon for some levity–unintentional, to be sure.

Sechin no longer has the outrageous mullet to amuse, but his public utterances suffice. Today at International Petroleum Week in London are a case in point. The mood at the event was gloomy, with pretty much everyone predicting that we are in a prolonged era of low prices, and everyone had their favorite culprit. But Sechin’s scapegoat was unique: Robots! Well, “robot traders”, anyways:

He blamed ‘financial players’ and automated ‘robot’ traders for driving down the price, saying the collapse to near $30 had little to do with supply and demand.

I presume he means algo traders and HFT. Just how these “robots” trading at subsecond frequencies have mesmerized producers and consumers to behave so as to lead to relentless buildups of inventory–including a looming topping out of capacity at Cushing–is beyond my mere economist’s skills to fathom.

Maybe Igor can commiserate with US cattle producers, who blame HFT for causing excessive volatility in beef prices.

Igor also seems to misunderstand that the “US” is not analogous to Saudi Arabia as a producer (although the phrasing is ambiguous, but I interpret this to include the US in “they”):

“At the end of 2014 some Middle East producers followed the US in their desire to increase production,” Mr Sechin told London’s International Petroleum Week. “They have deliberately created this situation and they are committed to low prices.”

The US oil sector is not a unitary decision maker in the way the Saudis are. The US industry is extremely fragmented and diffuse, with dozens of producers acting independently. They are price takers, not price makers. Very different from KSA or other producers with NOCs. (Relatedly, this is why calling the US the “new swing producer” analogous to the Saudis is dumb.)

It’s also more than a little hypocritical of him to criticize others for increasing output: Russian production has been increasing steadily over this same period.

Sechin also engaged in a little wishful thinking:

He forecast prices would recover later this year as US shale output slows. “We believe that in the coming years US shale will lose its grip on the market,” he said.

Good luck with that, Igor. US shale output has proved to be far more resilient than anyone had expected. Productivity gains and lower input costs have mitigated the impact of low prices. More importantly, the shale sector has the ability to ramp up output rapidly if prices do rise, either due to a rise in demand, or an attempt by other major producers to cut output. Indeed, this is likely the real reason the Saudis resist cutting output: they know it is futile because the supply of non-OPEC output is much more elastic than it used to be. This makes the demand for the output of the major producers, notably the Saudis (and the Russians!) more elastic than it used to be. This implies that it is not in the individual interest of any major producer to cut output unilaterally.

Which brings us to the most informative and refreshingly different part of Sechin’s remarks: his discussion of the prospects of a coordinated output cut involving OPEC and Russia.

This idea has captivated traders, who chase the idea like Randy Chasing the Dragon, shooting (the price!) up every time the rumor is floated, only to watch it fly away from their grasp. Once upon a time, Igor was notorious for encouraging such notions. Not this time around:

The most powerful figure in Russia’s oil industry on Wednesday signalled his steadfast opposition to combining with Opec to reverse the crude price rout through co-ordinated cuts in production.

. . . .
“Who are we supposed to be talking to about cuts?” Mr Sechin said when asked by the Financial Times if he was considering working with Opec, the producers’ cartel, to try to shore up the oil price. “Will Saudi Arabia or Iran cut production?”

Methinks that the real story is that the Saudis have made it clear that they trust neither the Russians nor (especially) other members of OPEC to adhere to any agree upon cuts, even assuming a deal can be cut, which is highly doubtful. So Sechin is acting as if he is the one rejecting the idea, primarily because he knows that it is DOA.

Not that this will stop all those Randys from chasing the next rumor of a coordinated cut.

Which raises the questions: Is Randy a robot? Are robots programmed to buy whenever a rumor of a Russo-Saudi oil deal is announced?

Maybe Igor will enlighten us in his next public appearance. Maybe he can do it to some musical accompaniment. Might I suggest this?:

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  1. On a semi-related note, would love to hear your thoughts on declining Brent production/Platts’ efforts to broaden the basket that comprises “Brent”. Is the benchmark in its dying days or can it continue to live on in an evolved definition?

    Comment by Abe Froman — February 10, 2016 @ 10:15 pm

  2. @Abe-I was planning on posting about that. I laughed when I read the articles, b/c several years ago when everyone was slagging on WTI, I pointed out that the inexorable decline in North Sea production was a much more dangerous problem than infrastructure bottlenecks in the Midcon, and that in a few years ICE/Platts would be dying to have WTI’s problems.

    Short answer: it is hard to kill a benchmark because there are so many legacy contracts tied to it, but keeping it alive and viable is very difficult. Pretty soon the only thing “Brent” about it will be the legacy name. It will be like the Harry Anderson bit about George Washington’s axe. The handle had been replaced years ago, and he just replaced the head, but it was George Washington’s axe!

    The ProfessorComment by The Professor — February 10, 2016 @ 10:45 pm

  3. You make good points. Then again, I wonder how much WTI is actually produced in West Texas these days? A name doesn’t quite mean what it used to.

    Comment by Abe Froman — February 11, 2016 @ 1:46 pm

  4. A name doesn’t quite mean what it used to.

    Well, quite: the Brent platforms are in the process of being decommissioned.

    Comment by Tim Newman — February 12, 2016 @ 2:29 am

  5. O/T but a view from over the pond on the US nomination race:

    “Since George H.W. Bush left office in 1993 America has been ruled by a spin-obsessed sex addict, a dangerous halfwit and a clever incompetent”

    Harsh but fair…

    Comment by Green as Grass — February 13, 2016 @ 8:31 am

  6. With a great deal of typical Brit snobbery.

    Comment by LL — February 13, 2016 @ 8:35 am

  7. […] post by Streetwise Professor reminds me that International Petroleum Week has just taken place, and once again Rosneft’s […]

    Pingback by Igor another presentation for you | The Oilfield Expat — February 14, 2016 @ 5:42 am

  8. At least not public knowledge that any of them sought oral copulation with a poor deceased pig.

    Comment by pahoben — February 15, 2016 @ 7:37 am

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