Energy Risk Awards 2016
Predicting oil prices and getting it right is no easy task – especially when the markets are as volatile as they have been recently. But Abhishek Deshpande, chief energy analyst at French bank Natixis, managed to pull it off. His bearish call on the price of Brent North Sea crude oil in the fourth quarter of 2015 won him the number three spot in a survey of 42 analysts published in January by New York-based data provider Bloomberg, which carries out a quarterly ranking of the most accurate oil price forecasters.
Still, that's not as impressive as the achievement of Deshpande's fellow London-based colleague, Natixis precious metals analyst Bernard Dahdah, who came in at number one in the London Bullion Market Association's survey of the most accurate gold forecasters last year. Dahdah hit the bull's eye with his prediction that the average price of gold in 2015 would be $1,160 per troy ounce, which proved to match the actual average precisely.
What's the secret to Natixis's forecasting success? Deshpande and Dahdah say they pay close attention to physical supply and demand balances, like other commodity analysts, but they also follow retail and institutional investment flows and other financial market trends. "Our base case is really based on predominantly fundamentals, but also exogenous factors, financial investors, macroeconomic indicators and our interactions with market players," Deshpande says.
Natixis does not have a particularly large commodity research team. It consists of just four analysts – two specialising in energy and two in metals – with plans to hire a fifth analyst in the near future. Still, the French bank's research has won praise from clients who appreciate its targeted focus and easily digestible reports.
One recent report, for example, came out ahead of the meeting of major oil-producing countries in Doha, Qatar, on April 17. The meeting – which included officials from Saudi Arabia and Russia, among other countries – sparked intense media speculation that the oil-exporting states would agree to freeze output, giving a boost to oil prices. Natixis offered a more sceptical take. In the end, the Doha meeting fizzled, and the oil market tumbled further the next day.
"When the Doha meeting was first announced, they were one of the first two banks to send out a quick one-page report on what this means and who the players are, and they turned out to be very right," says one reader of Natixis's oil research, a fuel manager at a major international airline. "They called who would get involved and who wouldn't, and to me, that was of a lot of value."
Deshpande sees the small size of his team as a plus, since it forces Natixis's commodity analysts to be strategic when deciding which topics to cover. "With a compact team, one advantage is that we're able to focus on what we think is the most important thing driving the market," he says.
At the same time, Natixis's commodity analysts are part of the bank's global markets research team. That means they can work with colleagues with expertise in such areas as macroeconomics, equities and fixed income and undertake joint projects with them, such as a report released in February that explored the worldwide impact of low oil prices. "Even if we're small as a commodities research team, we're quite large in global research," Dahdah says. "We're doing it as a properly functioning team, and that's basically our competitive advantage."
Natixis's analysts also work closely with the bank's commodity derivatives salespeople, sitting in on meetings with clients and helping to develop recommendations for client risk management strategies. Last year, for example, Natixis's energy research suggested that oil prices would stay low as the physical market remained oversupplied. With this in mind, the bank recommended that producers put on hedges to protect themselves against further drops in the price of crude, while investor clients were advised not to enter the market too early, due to persistent downside risks to oil prices.
"This was in July and August when a lot of analysts on the street were starting to turn bullish," Deshpande says. "We were still bearish. In fact, we were one of only a few banks globally that were bearish at that time, and we were the most bearish among them at one point."
Clients also appreciate their ready access to Natixis's commodity analysts, praising their willingness to discuss their research. "If I have questions about it, they're available and ready to answer them," says the airline fuel manager. "I value what their thoughts are and what they see in the market more than some of the other big banks."
The week on Risk.net, July 14–20, 2017Receive this by email