ArrowHead – A Unique Analytic Services Company

Helping Clients Understand Future Commodity Markets and Uncertainty to Make Better Decisions

Why Is Accurate Modeling of Future Commodity Markets Difficult?

Figure 1 Single Supply – Demand

The deterministic supply-demand diagram (Figure 1) is simple on its face, but deceptively difficult to calculate. ArrowHead consultants have performed this type of modeling at ArrowHead and its predecessor companies for over 30 years. However, in the modern world, such modeling isn’t enough. For useful market assessment, you need many supply curves (each with a probability of occurrence); many demand curves (each with a probability of occurrence); and a method of calculating the implied probability density function (pdf) over market price as illustrated in Figure 2 below. Alas, this isn’t so simple as 3 demand scenarios times 3 supply scenarios. The diagram belies the sophistication required to perform the calculations correctly. Market agents hedge. They trade. They throw off risk to other agents, who accept it because it throws off some of their own risk. They can have different probabilities for the same event. ArrowHead knows how to quantify this agent behavior and to determine proper probability distributions over market prices as market events occur. ArrowHead not only knows how to create probability distributions over individual prices, but also joint probability distributions over pairs of prices (structural correlations, basis differentials). This is what modern decision makers need to make investment, trading, M&A, and other decisions. ArrowHead Economics LLC is an economic, market, and risk consulting group that provides intrinsically probabilistic economic analysis, price forecasting, and decision evaluation. ArrowHead has technology, experience, and method to give decision makers the intrinsically uncertain economic situation (prices, quantities, capacity additions) and focus it on true decision problems.

Figure 1 Multiple Supply – Demand

What We Do

ArrowHead is a unique consulting services and software analytics company. We help clients understand future commodity markets to facilitate better decision making and to help them assess the impacts of potential market events on the markets and on their businesses. The types of decisions and issues are detailed in ArrowHead Solutions (Natural Gas, Power and Environment, Oil and Refined Products ) but generally these are decisions, such as capital investments and trades, and issues, such as regulatory change or events affecting supply.

Why Is ArrowHead Unique?

There are numerous reasons ArrowHead is unique and they are detailed in Why ArrowHead . But the main reasons are:

1. Our consultants:
   • Are experienced and knowledgeable in the markets we serve
   • Utilize the unique ArrowHead models
     • Used and improved over 40 years, helping clients to better understand future commodity markets confidently to enable making better decisions
     • Utilize a methodology that uses sound economics and probability to accurately model the way markets work operationally and competitively
     • Include uncertainty, producing accurate probability distributions for all outputs (price, quantity, basis, capacity additions and retirements)
2. As a company, we are:
   • Focused on understanding clients’ needs and helping clients to meet them
   • Flexible, working with customers in the way that they prefer
   • Cost-effective for clients, providing a level of value efficiently and with low overhead