2019 Crude Oil Trading: Why You Need Prescriptive Analytics

2018. What a year for crude oil: At the top of its game, it peaked at $81.20 per barrel, only to fall by year-end hovering around $50 a barrel.

If you’re questioning what 2019 will bring, here is a consolidated view of what forecasters and traders are saying about this year’s trends:

What Price in 2019?

So we know three essential components dictate crude oil prices: supply, demand, and inventory. However, 2018 proved that a fourth — volatility — should be permanently added.

Below are a few contributors to this year’s crude oil price volatility (not inclusive): 

• U.S.-China tariff tango
• U.S. shale boom
• Iran sanctions
• OPEC’s possible breakup
• Climate change
• Corporate social responsibility
• Federal interest rates

But volatility in crude oil production and trading isn’t new. Geopolitical and climate conditions have always been factors, however, in 2018, volatility reached new levels, perplexing even the trader known as the ‘God,’ investor Andy Hall. Although crude oil pricing dropped 30%, Hall forecasts it will continue to rise as current lower prices will increase demand. This aligns with Goldman Sachs’ 2019 forecast predicting crude oil at $70 per barrel, slightly more than Morgan Stanley’s Brent crude oil price forecast at $68.50.

So with this bit of good news is it possible to overlook a few rough bumps throughout 2019?

The answer is yes, considering that the economy overall is predicted to expand 2.5% or more.¹ However, the real question is at what cost to profits and margins, and why companies need prescriptive analytics.

Crude Oil Trading with Transparency in 2019

The volatility factors listed create a need for traders to have ongoing insights to complex, multi-dimensional views. The extraneous data that trading software needs to consider abounds: weather, alternative fuels, new environmental rules, floating prices, logistics to include timing, delivery, origination, and destinations. Each trade has layers of seemingly infinite dynamics.

In one of River Logic’s earlier customer success stories, we showed how one major oil company fortified its arsenal with prescriptive analytics. The customer now uses prescriptive analytics to improve profits for its trading division by tens of millions — the initial impact in a short two-month timeframe. Some of the insights that were  gained from prescriptive analytics included:

• Least cost routing and utilization of transportation assets and agreements
• Optimal purchase and sales timing and locations
• Optimal inventory positions
• Forward view of portfolio without having to schedule the activity in an Energy Trading & Risk Management System (ETRM)

Upstream, Midstream, Downstream: 2019 Crude Oil Improvements with Analytics/BI

In addition to trading, prescriptive analytics offers all sectors of the crude oil a competitive edge because of its ability to optimize decision-making from multiple perspectives such as demand shaping, capacity planning, supply planning, Inventory planning, product mix and profitability, financial planning, customer service policy, and more. 

• Upstream, prescriptive analytics offers insights on how to reduce costs and considers other possibilities with new environments and extraction techniques. It looks to reduce inventory costs and workforce costs through more efficient staffing. Investment decisions become data-driven decisions by knowing the impacts of acquisitions and repurposing assets.

• Midstream, prescriptive analytics reduces logistics, storage, and wholesale marketing costs, optimizing best methods of transportation such as rail, barge, truck, and pipeline.

• Downstream, the availability of a skilled workforce, feedstock selection, and product mix decision-making can be validated with financial outcomes.

Trade-Offs: Faster, Better, and More Accurate with Prescriptive Analytics

To summarize 2019, trends will drive the trade-offs. Companies will need to act faster, better, and be more accurate in taking action with energy planning/forecasting. Prescriptive analytics has proved to be an ongoing, game-changing solution to ever-changing dynamics and why it’s crucial to maintaining profitability this year.

 ¹2019 Outlook: U.S. Stocks Could Rally About 10%, Dec. 14, 2018, Barron’s.