If the current level of oil prices is sustained, fuel prices could rise sharply after the general election is held on May 9 and 2018 CPI inflation could rise above its 2.5% forecast towards the top end of Bank Negara Malaysia
NO one is more surprised by $75 oil prices than Wall Street’s oil experts.
The price of crude has climbed nearly 12% this year and has reached its highest levels since 2014—a rally that has caught most big banks flat-footed. Last December, analysts surveyed by The Wall Street Journal predicted that Brent crude, the international benchmark, would average around $57 a barrel in the first quarter. Instead, prices averaged $67. On Friday, Brent prices rose to $74.87 a barrel.
Analysts often get it wrong across financial markets. Last year, they wildly underestimated gains on the S&P 500. Gold hasn’t followed the script of the almost yearly predictions for higher prices. And U.S. bond yields have persistently undershot the estimates of many large firms for years.
But oil is seen as particularly tricky given its sensitivity to hard-to-gauge geopolitics and the opaque workings of the Organization of Petroleum Exporting Countries.
Recent years have been particularly challenging. The rise of the U.S. shale industry confounded all expectations, OPEC has shocked the market with its policy decisions, and the rapid collapse of Venezuela and other geopolitical shifts have jolted prices higher faster than many expected.
“Predicting oil prices is a mug’s game,” said Craig Pirrong, a professor of finance at the University of Houston. “The inelasticity of supply and demand mean that the price is very sensitive to random shocks that are themselves hard to predict.”
But those predictions are important, as they’re scrutinized by producers deciding whether to drill new wells, airlines looking to hedge their fuel costs and governments planning state budgets.
Analysts scrambled to downgrade their outlooks last spring, when oil prices tumbled amid rising U.S. output and concerns that a deal by OPEC’s and its allies to cut production would fall apart.
But they were too slow to adjust again when prices started to climb months later. In September, analysts thought oil prices would average $52.83 in the final quarter of last year—about 14% below the actual average for the period.
“Forecasts can be upended by unexpected events—it’s your best call at a point in time,” said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas. “Sometimes you get all the variables right, but your interpretation is not always the same as that of the market, so the forecast is off the mark.”
Nonbank forecasters haven’t fared much better. Oil forecasts made by the U.S. Energy Information Administration, for instance, have often missed the mark. The agency’s prediction for the first quarter of this year was off by 15%.
Jonathan Cogan, a spokesman for the EIA, said that a range of factors such as unanticipated supply disruptions, OPEC policy decisions and weather, as well as the lack of accurate data outside the U.S., can lead to oil prices missing expectations.
In explaining the recent miss, analysts point to a confluence of unexpectedly bullish factors that has kept oil supply lower than expected. In particular, OPEC and its allies defied predictions and stuck close to their 2016 deal, while lower production from cartel members like Venezuela and Angola helped the entire group hit the overall target.
Demand also played a part, as a rare burst of synchronized global growth stoked appetite for oil.
Worries about an escalation of the Syrian conflict or a U.S. exit from the nuclear deal with Iran have added a so-called geopolitical premium to prices. Those events have become more important in determining prices as the oil glut has dwindled, reducing the cushion that insulated the market from the impact of surprise disruptions.
In general, limited data don’t help, either. In the past, prices were more reliably correlated with inventory levels in the developed world, said Antoine Halff, senior research scholar at Columbia University’s Center on Global Energy Policy. But developing countries that are becoming more important to the oil market are some of the most opaque when it comes to publicly available information.
To be sure, most forecasters anticipated that oil prices would climb, even if the magnitude of the move has been a surprise.
“Albeit higher than consensus, this was one of the most telegraphed rises in oil prices,” said Jeffrey Currie, global head of commodities research at Goldman Sachs . And a decade ago when supplies were more uncertain, forecasts were much more spread out—a range of expectations from $40 a barrel to $180 a barrel in a given year wouldn’t have been unusual, he said.
“Is $75 to $80 or even $85 really that shocking? The answer is no. We are within the range of possible outcomes given that shale is now the dominant technology,” Mr. Currie said.
Many investors said they ignore price forecasts and focus on market trends.
“I don’t look at them at all; most of them are conservative and backward looking,” said Doug King, chief investment officer of the Merchant Commodity hedge fund. Others have developed their own yardsticks to gauge oil prices.
Bob Minter, who covers commodities at asset manager Aberdeen Standard Investments, said he reads bank reports “religiously”—but not for the numbers.
“I don’t look at the price forecasts but rather at the underlying analysis,” Mr. Minter said.
But others even see banks’ forecasts as a contrarian indicator.
“Banks have been terrible at forecasting the oil price, which has given investors a great opportunity to be contrarian,” said Geir Lode, head of global equities at asset manager Hermes, who said he’s more bullish than the consensus on oil given a strong demand outlook and a lack of new large fields going online. - WSJ
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