With energy markets facing enormous change, the need for in-depth market intelligence has never been greater. However, producing useful decision-making insights has become extremely challenging due to the lightning speed of change, the unprecedented nature of recent events and the massive amounts of data available.
Step forward the Standard Chartered research team. Over the past five years, it has developed a number of proprietary analytical tools that enable it to deliver unique and timely insights across the world of commodities. These tools include an oil producer hedging survey, an index to compare cross-commodity speculative flows and a US oil index that measures the bullishness or bearishness of the latest US data on inventories, demand and output.
While the data crunched by the tools is publically available, the analytics give the team an edge, allowing it to “play around with underlying data to get a much richer set of numbers” and “provide a fresh take”, says Paul Horsnell, head of commodities research at Standard Chartered.
The timing couldn’t be better: updates to the three tools mentioned above were released over the course of last year, just before a series of major market-moving events hit. These included the attacks on Saudi Aramco infrastructure in September 2019, the temporary production cuts by the Organisation of Petroleum Exporting Countries and Russia in March, the ongoing demand shock of Covid-19 and the plunge of oil into negative territory.
When West Texas Intermediate (WTI) crude futures dived below zero in April, the research team addressed a barrage of questions from incredulous clients, says Horsnell. “The two main questions were: “How did this happen?” and “Can it happen again?”,” he says.
As each major event occurred, the team – which also consists of Suki Cooper, who covers precious metals, Sudakshina Unnikrishnan, who covers metals and ags and Emily Ashford, the team’s oil analyst – leapt into action conducting webinars and creating bespoke client content to communicate its particular insights into the commodities markets at this time.
A tool that has been particularly helpful of late is Standard Chartered’s energy producer hedging survey, which covers more than 80 US shale companies and contains 20 quarters of historical data. “[When oil prices dropped in early March], the first question clients asked was ‘how well hedged are shale companies?’” Horsnell says. The team was able to provide an immediate answer of 51% for 2020 and 9% for 2021. As of May 11, levels were 68% for 2020 and 16% for 2021, according to Standard Chartered’s latest survey figures.
“We can also provide more detail down to the different plays, for example,” Horsnell continues. “We can be very precise in terms of the distribution optionality in the hedges, the average collar. And if organisations are doing three-way collars we can pinpoint the subfloor point at which they start losing value and so on. It gives us a very detailed view of market dynamics.”
The Standard Chartered research team has also created other tools to provide deeper insight into data from standard industry sources. For example, its US oil index visualises data on inventories, demand and domestic crude output from the US Energy Information Administration’s Weekly Petroleum Status Report on a scale of bearish to bullish for oil prices. It also produces an index examining cross-commodity speculative flows using information from the US Commodity Futures Trading Commission and the Intercontinental Exchange.
If organisations are doing three-way collars we can pinpoint the subfloor point at which they start losing value and so on
Paul Horsnell, Standard Chartered
The team has also proven it can react to market developments with speed, as well as “depth and clarity”, Horsnell says. Standard Chartered’s assessment of how coronavirus would affect oil demand, published on 18 February 2020, was “ahead of the competition” in forecasting a severe demand reduction for the first half of 2020, he says. The true extent of the demand destruction was inconceivable at this time, weeks before most Western European countries imposed lockdowns, but as the situation rapidly progressed, the team forecast a demand loss of more than 10 million barrels per day (b/d) for the first time on March 17 – forecasting 10.4mb/d for April 2020. It revised that two weeks later to 18mb/d, with the 2020 average loss at just over 5mb/d.
“That’s been fairly solid since,” Horsnell says, adding the current outlook is for an annual average drop of 5.53mb/d for 2020 versus 2019, with April 2020 still seeing the largest year-on-year fall at 18.5mb/d compared to April 2019.
Given how fast recent events have moved, what clients value most is the speed of Standard Chartered’s response and the clarity of its insights, says Horsnell. “When events are moving very quickly, clients want clear answers,” he says.
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