Disruptive Markets  

   Managing Uncertainty    

Causal Capital ~ The Knowledge Capital Specialists

The Prisoner Dilemma in Oil

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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