Disruptive Markets  

   Managing Uncertainty    

Causal Capital ~ The Knowledge Capital Specialists

The Prisoner Dilemma in Oil

Wednesday, February 17, 2016

Oil prices went south after Saudi Arabia and Russia failed to come to an agreement to set steady output to support a rally in oil prices.

 

The day began with high hopes after Russia, Saudi Arabia, Venezuela and Qatar agreed to freeze production, news that sent oil prices up by more than 6% in hopes that a deal would ease a global supply glut.

 

But it ended with that agreement already in doubt after Iran said it would not participate. Its absence stoked fears that a deal couldn't be reached without all the major producers, and oil sold off strongly throughout the day.

 

Oil Prices Turn Negative | The Wall Street Journal LINK

 

Brent Crude Oil Front Month | Feb 16, 2016

 

Oil prices are entirely captured in a Prisoner's Dilemma and if one thinks about it more broadly, this is unlikely to be resolved by traditional market forces.

 

Game Theory The Dominant Strategy | LINK

 

 

A rise in prices, if that occurs, is more than likely to be driven by some external disruptive factor such as a collapse of a major player, a war or an environmental catastrophe but even still ... The prevailing dominant strategy is then encouraged to resume once the stress factor is removed. Price rises in such a system are probably going to be short lived until demand massively returns for energy resources and modifies this current price dynamic horizon.

 

The worse is yet to come | Bloomberg [LINK]

 

Goldman’s Currie sees oil volatility going higher with two points of stress, “Operational Stress” such as breaches in storage capacity and “Financial Stress” that will give a swing trade action on oil between $20 at a cash cost and $40 a barrel.  In effect, Price Volatility converts to Fundamental Volatility to drive drops in prices that could foreseably push oil prices into the teens at times for the next nine months.

 

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