Recent Events in Energy Markets

Transcription

1 Recent Events in Energy Markets A Market View Glen Swindle Scoville Risk Partners Oct 28, 2015 c Glen Swindle: All rights reserved 1 / 15

2 Context A lot happened in the last decade. Benchmark prices spanned a huge range. Credit crisis and aftermath demand destruction and regulation. Unconventional production price impact relative and absolute. Growing impact of renewables. Polar vortices. Regulatory-induced drop in liquidity. How well positioned are we to deal with whatever comes next? 2 / 15

3 Retrospective Viewed from the global energy benchmark. 160 Brent Rolling Cal Strip 140 Stimulus 120 $/Barrel Credit Crisis Liquidity Macroeconomic + Technology 40 Energy Investments Under Pressure / 15

4 Retrospective Build Up A lot of people rationalized this price increase BRICS + decoupling. Trades occurred implying non-trivial probability of prices above $200/bbl. 4 / 15

5 Retrospective Credit Crisis and Initial Stimulus High forward yields tankers leased for storage saw drops in consumption even global electricity usage. 5 / 15

6 Retrospective Credit Crisis and Initial Stimulus Weather normalized view of electricity demand destruction. - Model calibrated to data prior to mid Not anticipated by most if not all market participants MW Residual by Month: 5x16 0 MW Percentage Residual by Month: 5x16 0 % / 15

7 Retrospective Stimulus Treadmill. Partial rebound in global energy prices. No appreciable change in global leverage just shifted from household to government/corporate. 7 / 15

8 Retrospective Price Collapse Sudden collapse in prices. Substantial stress to producers. 8 / 15

9 More Recently The latest price collapse was visibly different than XLE is a broad energy ETF. Stripping out SP500 as a market index yields the following response to Brent. The sell-off showed substantial out-performance $ / Share Energy Equities Out Performed $ / Barrel $ / Share Energy Equities Under Performed $ / Barrel 9 / 15

10 More Recently Renewables have also been severely impacted. SCTY (Solar City) versus rolling calendar NG strip. Stripping out SP500 as a market index yields the following response. 40 SCTY "net" SPY vs NG (Jan 12 Sep 15) $ / Share $ / MMBtu 10 / 15

11 More Recently How have the benchmarks fared? Different phenomena in play unconventional production. Electricity price drop buffered by generation stack. 1.8 Normalized Rolling Cal Strip Prices 1.6 NG Price Collapse Oil Price Collapse Price Ratio Normalized Prices Fuel Switching in Floor Play WTI NYMEX NG PJM Peak CentralApp / 15

12 More Recently Locational price spreads have been turned upside down. TETCO M3 is a Northeast U.S. gas hub. From 2010 to 2015: - Substantial price drop. - Price inversion. M3 is now discount to Henry Hub, Louisiana (NYMEX) for most months Forward Curves (09/30/2010) NG NG TETM3 $/MMBtu Forward Curves (09/30/2015) NG NG TETM3 $/MMBtu / 15

13 Project Finance Liquidity Key benchmark liquidity has ostensibly improved: - Open interest in WTI and Brent has generally increased over this period. Functional liquidity has dropped dealer exodus. - It is much harder to hedge price risk where you are building an asset. 160 Brent Rolling Cal Strip $/Barrel Liquidity / 15

14 Project Finance Financing and Hedging The Project: - Borrows money to build an asset. - Asset will generate random cash flows. - Structured hedge annuitizes the cash flows for a period of time. If you can t get a hedge near your asset, the project and its lenders are exposed to unwanted and undesirable price and asset performance risk. Rigorous hedge quality ratings analysis is more important than ever. Asset $ $ $ $ $ Asset Cash Flows Debt Stuctured Hedge $ $ $ Payment Annuity $ $ $ Hedge Cash Flows 14 / 15

15 Relevance of Forward Curves A cautionary comment on predictions. Forward curves: the price you can trade now for delivery then. - Set by market forces. - Driven in large part by cost of storage. - Forecast performance is underwhelming. 160 Brent Forward Curves with Spot $/Barrel Jan Jul Feb Apr Jan / 15