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Name Age Citizenship State Location Education Trading Experience Word Count

Trey 23 United States Texas Local Texas Community College None 1,243

Oil will trade at $5 per barrel before it trades at $250 per barrel by the year 2050. Discuss. Maximum word count = 2,000 words. Answers over 2,000 words will be automatically disqualified from the competition.

Submission; Right, so I’m going to try and lay out a persuasion as to the notion that by the year 2050 crude oil prices will be $5 and not $250. I’ll list them out here, and by grace you’ll be interested enough to read on to my comments and thesis below: Headwinds: -Reduced demand due to demographics (major nations under-fertilized and will suffer population declines) and the transition of the automobile market to electric vehicles. -Oil inevitably will be replaced by renewables as primary source of energy. -US “Frackers” will regain superior market share and revert price stability seen in periods like 1946-1960 -Breakup of OPEC; back to stability – most of the dramatic price rises have been caused by middle-east unrest, coups, and embargos. -Game theory i.e. current affairs where the producers accept lower output prices in order to gain market share thus lowering the aggregate revenues. -Ice caps melting giving way to more artic drilling, new discoveries in Permian Basin & Gulf exposing more mineral rich supplies. -30 year bull bond market likely to reverse in US pushing financing costs higher, encouraging more production to fill gap of interest cost in cash flows. -“Fracking” has a lower break even around $10-$20/barrel AISC (all in sustaining costs) once fixed costs are established -Almost 50% percent of the time prices were below $14.91/barrel from 1893 to present. -1946 to 2017 Mean = $24/barrel Tailwinds: -Systemic risk of nations; Net exporters of oil don’t want to see their paycheck disappear and will defend that fate. Whether it’s the U.S. imbalance of Baby Boomers vs. the incoming Millennial’s, or the Japanese .78% decline in the population since 2011 (stalled since 2004) the next few generations are screwed. In the near and intermediate term that’s going to impede demand for energy in a sobering way. Any perceived offset in rising demand from emerging markets will be further along in the time horizon and by that time will be a renewable’s realm. Wind, solar, ocean oscillators are all making technological advances and beginning to produce very low operational costs, some beginning to surpass coal and clean coal overhead. It’s only a matter of time until people get irrevocably tired of the BS swings at the gas pump and decide to make the EV switch. I went to a little redneck college in Texas, but I know what a supply and demand curve looks like and when demand is reduced you better believe that equilibrium does too. I say that in semi-arrogance because it seems the consensus in the Middle East (and Russia I guess) is that when demand seems feeble it’s a cause for more output. I don’t expect an old dog to learn THAT new trick before the rug is pulled out from underneath. Next I need to lay out a period in which oil prices were in prior low trading ranges. 1946-1960 was a period in which oil traded between $1.25/barrel to $3/barrel. 1960 it all changed once OPEC came on the scene (and shortly after regulations) so the landscape isn’t the same. During this period the U.S. was not a net importer of oil like today, so the dollar denominated commodity was much more stable and less manipulated. This isn’t a glory day’s memoir; just showing the range is real and possible. But I do think that the horizontal drilling techniques seen in the 21st century will (and arguably has been) pull the producers break evens and the margins down from the triple digit ranges seen recently. I believe

from there they will regain the leading foothold (barring red-tape) and end the paradigm of selling prices that reflect deep drilling in the sand dunes. Let’s move on to the inevitable OPEC breakup. Credit where credit is due- they have survived a long time in “unity”. I mean that despite the totalitarian imposition of member cuts, exclusions, and market share divvying. I subscribe to the belief that the current overproduction especially by Saudi Arabia is in response to the advances of fracking technology and highlights the fear and possible paranoia of producers as to what is to come next. The oil industry is changing, and it will be interesting to see the members begin to eat each other as the pie shrinks. This is the current state of crude, producers competing in the all sinking “game theory”. March prices lower, gather and protect market share from the competitors, and screw the consequences! But without moving on, I have to make mention of the existing chaos going on within the region and speculate this will all come to head in a multiplicity of detriment. Extrapolating that dismal outcome, I have to believe that this will be the straw that broke the camel’s back, ending OPEC coordination. The 30 year bull bond market has staged a reversal, at least at this point in time. So will yields reverse course from their low of 1.36% on the 10 year bond, back to their glory days in the early 80’s of 14% & 15%? With central bank intervention who knows? But this isn’t a bullish piece on oil prices, so let’s assume they will go higher without putting a ceiling on it. This is going to raise financing costs for everyone, including oil producers who are refinancing their liabilities. Those interest costs are little deductions from the EBIT on the income statement, but they also represent an expensive capital structure with bank covenants that have a hand on the balls of the cash flows and current ratios – that means increasing production to supplement the top line revenues. I think I already covered supply and demand, but yeah excess supply isn’t good for prices. So let’s end on some fundamentals of both horizontal drilling and historical crude prices. Why the fuss over horizontal drilling vs. previous vertical? It changed the paradigm for oil extraction. Projects that yielded oil from a single hole with expensive drilling and extraction equipment are now able to drill 25 additional horizontal holes with nothing more than water and mineral mixture. For a lean vertical project the AISC (all in sustaining costs) per barrel would hover around $40-$50-, but when we flip the landscape horizontally the overhead drops to around $10 -$15 per barrel. Producers under this environment can afford to float lower prices for competiveness. This will increasingly alter the sentiment of how crude is traded and will help ride us to that $5 spot price neighborhood. But we just had $100+ oil-per-barrel in 2014? If we take a look in the rear-view mirror we’d see that from 1946-2017 the mean spot price for crude oil was $24/ barrel. Furthermore, from 1893 to present, prices of oil have been below $15/ barrel almost half the time. I think I laid out my best and most compelling case for $5 oil prices, before $250 by the year 2050. Of course, tailwinds for oil prices will always be overreaching Governments of net exporters. It’s hard to imagine what a socialistic Venezuela or authoritarian Saudi Arabia would be without their vast natural resources, and I have no reservation that they will bring their most desperate efforts to defend their paycheck. But I wouldn’t bet my money on their efficacy. Right or not, at least I can say I wasn’t cheerleading a dead-end, hoping to make a fortune long crude oil.

ITPM Response and Comments. Trey. This was not a perfect submission. With a word count of 2,000 words you could have completed further research into the risks of Oil NOT going to $5 other than Geopolitical. Additionally, there were no charts / descriptive statistics to help the reader visualize some of the very valid points you were making. However, you have displayed unlike the vast majority of entries an ability to think critically, creatively, outside the box and with decent logical reasoning. The way you construct your arguments and your case however does need work. You displayed immediately that you understood the question and didn’t waste any time in getting to the meat and potatoes of what your view is and why you back your own view. I liked this approach! You mentioned plenty of headwinds in the first part of your answer like demographics and renewables and you seem to be piecing together intuitively (almost without realizing it) your view is that the pace of Renewable development is set to outpace developed world Demographics. This is something many highlevel research analysts in the industry have concluded. I liked this as it shows you have not even formally researched / read about this properly but you somehow know about it instinctively. You are displaying here evidence of critical thinking ability but not in a formal way. This is evidence of a raw talent to think critically. I especially liked your thought process on the breakup of OPEC. You were literally the only person who submitted a response to the competition that stated the case for this. Again, displaying a different way of thinking and ability to think outside the box. You concentrated a lot on Fracking and production costs which I also liked, because these issues are structural to the industry and have nothing to do with cyclicality which most people seem to concentrate on or find difficult in separating and formalizing. You were also one of the very few people that chose to analyze the impacts of a Bond bear market and the likely impact on Oil prices. Another example of stating a case of different thinking. Stats – You were also one of the very few people to go back as far as the 1800’s when looking at the Oil price and the prices of the period 1946-1960. Where you fall down is on the structure of your arguments and basically nailing your case i.e. making it so it is very difficult to argue against. In some parts, you even argue with yourself. It would have been good to see descriptive stats, data and charts that prove either categorically or with high probability that what you are saying will happen. Slam the final nail in the coffin by making the reader realize they have no comeback. This exercise is fruitful because in trading if you can find evidence with massive conviction then you find trades with high conviction. It’s not about proving to me (the reader) that you’re right, it’s about proving it to yourself and having total conviction in your case. So, when you take positions you know why you are in them AND you have total conviction with a plan to exit if it goes wrong. Overall, given your age and background this was a really really good entry. Hence why we chose you as a winner. I can tell by reading this that you do not have the formal “university” style of putting together an Essay submission / debate with reference citing and proper academic structure. But it doesn’t matter. We are testing for Critical Thought, Creative Thought, Logical Reasoning and ability to think outside the box here. Which you have displayed. I really like how your mind works. It is evident you have a raw talent and

that’s why we have decided to give you a chance on the Scholarship Program to help you nurture this talent. Our Mentors Raj and Ben will help you with this and develop you further in Florida. Overall I really enjoyed reading your submission and I’m really genuinely looking forward to seeing how you progress in the future. GOOD LUCK !!! ;-) Anton Kreil Managing Partner Institute of Trading and Portfolio Management

Florida Scholarship Winner Trey