Bottom Up

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Bottom up forecasts involve counting current, under construction and ordered assets like drillships, FPSOs, or jackups.   Bottom up forecasting is quite helpful in predicting market developments over the order-to-delivery life cycle, as much as five years for deepwater projects, and as little as one year for US onshore pipelines.

Beyond the delivery horizon, however, visibility falls quickly, and bottom up forecasting no longer provides useful guidance.

  Top Down

 Photo Credit:  ms.akr

Photo Credit: ms.akr

Most forecasts are top down, and start with GDP or perhaps a statistic like income or population growth, and then forecast some specific variable on that basis.  Oil consumption, for example, is often forecast as a function of GDP. 

We often use top down forecasting, typically determining logical relationships through extensive discussions with industry participants.  For the efficiency of drillships in Brazil, for example, we might speak with Transocean, Petrobras and an investment bank like Credit Suisse.

Top down forecasts rarely flag turning points.  Whatever trend line is found tends to persist in market forecasts.

 

Binding Constraint

Binding Constraint Analysis is a third method, and we may be the only users of this approach. 

Such analysis holds that a system--like an ecology--will grow until a critical resource reaches its limits.  This could be physical assets, capital, income, labor, land or energy. For oil, the limiting resource is income on the demand side, and low cost, accessible reserves, for supplies.

Such limits can also be behavioral, reflecting management or investor beliefs or preferences.  In recent times, investors have demanded dividends from the major oil companies, but have sought growth rather than profitability from shale operators.

Binding constraint analysis can be a very powerful tool in predicting market inflection points.