Forecasting oil prices has proven to be a difficult exercise this year, with investment banks, ratings agencies and national and supranational organizations left baffled by how the market price has fluctuated throughout 2016.
Barclays are one such investment bank who have been wide of the mark with oil price predictions, forecasting Brent Crude to bottom at $37 per barrel in January, $9 above the actual $28 price that was seen.
Although they redeemed themselves with their projections for prices in March, with a nearly correct prediction of $39 per barrel, in May their forecasts were sometimes off target by $5 at $44 per barrel.
The methodology that Barclays uses for its price estimations is largely based on economic conditions that counter balance the oil market.
In their latest commodity report they forecast that oil will increase to $47 for the remainder of this quarter, this is due to clients believing that ‘Brexit’ will have little influence on the market balance.
A more normal winter, compared to the mild one of the last year, is also a factor for this prediction. Additionally, political uncertainty in Nigeria and Venezuela may mean lower OPEC production.
The report was published before OPEC agreed the deal in Algiers to cut production, and major market shifts such these will have a huge bearing on forecasts, highlighting how difficult it can be to get the predictions correct.
Goldman Sachs, before the OPEC agreement, said in their commodities report that their forecast would move from $50 per barrel to $43 in the fourth quarter of this year, this is due to oil supply-demand balance being weaker than expected, and limited increases in Libya and Nigeria.
While the potential of an OPEC deal could support prices in the short term they said, the investment bank found that the potential for less disruptions and still relatively high net long speculative positioning, leave risks skewed to the downside into year-end.
- Andy Brogan, Partner and Global Oil & Gas Transaction Advisory Services Leader at EY, in response to the OPEC meeting, opined that
“It’s not a straight line from this announcement to permanently raised oil prices. There are a number of intermediate steps and remaining uncertainties which need to be worked through first.”
The announcement has to be converted into actual cuts in production, as this is being carried out by committee, the cuts actually have to be agreed to and implemented, and historically this has created issues
Also, the production cuts have to start a sustained draw from inventories, plus non OPEC production has to show that it can drop back in responding to any tightening in the market.
- Jim Ritterbusch, president of energy consulting firm Ritterbusch and Associates, said:
“The overall macroeconomic situation is fundamentally more cross current than usual in the past year, an array of factors offered as much bullish ammunition as bearish, so it’s a polarization in views, as a result that is why many institutions have predicted the prices wrong.”
“I have also been bullish and bearish, but did call the $26 per barrel in the early part of this year.”
“Forecasting oil prices is not a static business, technical and mathematical trading models have to be tweaked as conditions change and variables have changed, its dynamic and you have to factor new trading variables.”
“As for the rest of this year, crude supplies globally will continue to rise and that oil prices per barrel will be $50.”
The United States Energy Information Administration (EIA) upped its forecasts of average crude oil prices by $1 a barrel to $43 back in June, highlighting how pessimistic judgments can be made too. This forecast has undercut the actual average monthly price since then, most notably in June where prices spiked to just under $48 for the month according to the World Bank.
The EIA also uses their own forecast of global oil supply and demand to make oil price estimates, and there are always uncertainties surrounding both of those components.
“Often, but certainly not always, prices end up being higher than forecast because of disrupted production somewhere in the world.” Said Tim Hess, the EIA’s product manager of their Short-Term Energy Outlook.
“Conversely, lower than forecast because global oil demand could be a factor that keeps prices below what we’ve forecast, this situation could materialize if economic growth does not hit projected levels.”
Another factor to keep in mind is the economics of U.S. tight oil production. If that production is more robust to a low oil price environment than what is currently being forecast, then prices would be kept lower. However, if production falls more quickly than forecast due to low prices, that could actually contribute to prices rising more quickly than the EIA forecasts.
We will see if the interested institutions can fare better with their crystal balls in 2017.
By Peter Taberner for Oilprice.com