Forecasting oil prices has proven to be a difficult exercise this year, with investment banks, ratings agencies and national and supranational organisations 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. Related: Can Microwave Technology Compete With Fracking?
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." Related: 1.5 Trillion Barrels Of Recoverable U.S. Oil Waiting To Be Tapped
"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 judgements 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 being currently 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
More Top Reads From Oilprice.com:
Peter is a reporter for FX Empire, and the International Finance Magazine, where he writes on energy markets, specializing in nuclear power and the renewable… More
Comments
1) Most analysis begin their analysis (at least the ones presented to the public) with a biased lens that is looking for the answer that matches up with the bets they've made in the market. So right from the start, most of these guys can't be trusted because there is zero accountability for them being wrong, they only answer to themselves and their influence is one way to help make money.
2) They don't have a clue about a huge chunk of the market. They all focus only on the biggest players for demand and supply. Emerging market demand is hugely misunderstood, and there are millions of barrels of production out in the world that no one pays much attention to, but are affected by market dynamics like anywhere else. 30 areas producing 100k/day losing 10% of production each because of cost cuts has just as much effect on the market as 1 player producing 3M/day cutting 10%. But, keeping track of everything is too hard especailly when nothing is truly consistent. The small players aren't showing a constant flow into the markets, it's up and down and all over.
Also, oil stored at sea and privately has very questional visibility. For example, all the hidden barrels that came to land this summer in the USA because of contango weakening. No one had a clue that how long it would last, and many didn't know what what happening. That hidden oil dried up and lead to shocking draws that everyone continued to struggle to explain. These types of things happen all the time because no one can truly keep track of all the moving parts of the market.
If North America is a rather expensive place to store oil and every time there is a build in oil at Cushing the price drops..... wouldn't it be better to draw Cushing down and store the oil elsewhere leaving Cushing as a last resort.
Wasn't it Iran that signed a multi billion dollar deal to build more tankers.
Is OPEC just diverting attention? We now have a bigger glut than ever and guess what.... Global warming means we have to stop burning the stuff. The Paris agreement objective was to do away with coal plants and combustion engines by 2030. When that happens oil will be delisted.
In the long run.... I think I'd be playing the downside of oil. I bet OPEC is.
To expound on this,we chart supply and demand with the assumption of a static currency, however, our real world costs are incurred in various denominations of different currencies and one predominant currency, the US dollar. So hypothesizing that one has perfect predictibility of the supply and demand curves and you come up with a perfect prediction as to the price of oil given an unchanging value of the dollar, one must realize that interest rate fluctations along with quantitative easing and varying degrees of international currency valuations change the dynamic of the equation so that much like the weather, one can only predict it to a certain extent.
But there is no evidence to support the theories, and Saudi Arabia and the United States rarely coordinate smoothly. And the Obama administration is hardly in a position to coordinate the drilling of hundreds of oil companies seeking profits and answering to their shareholders.
Some analysts still question how long the current recovery can be sustained because the global oil market remains substantially oversupplied. In the United States, domestic stockpiles are at their highest levels in decades, though they are coming down as seasonal driving picks up.
But over the long term, demand for fuels is recovering in some countries, and that could help crude prices recover in the next year or two.