Massimo Bellino

Thematic (Sector/Industry)

Brazil Energy / Thematic (Sector/Industry)

Since falling to the 12-year minimum of $28 per barrel in January 2016, the Brent crude oil price has climbed by 168% to reach the price of $76.46 per barrel as of the 8th of June. With the global petroleum product inventories expected to normalise to five-year averages in late 2018, the global oil glut that triggered the decline of oil prices in 2014 has effectively been eliminated. As we enter a new oil cycle, market participants have been trying to gauge the direction and shape of the future oil price trend. As shown in Exhibit 1, the current consensus forecasts for the Brent oil price in the next four years range between $60 and $80 per barrel while the forward curve implies a slow decline to $62 per barrel by 2022.How successful have the teams of economists hired by investment banks been to predict the future oil prices?Since the price of oil fell sharply in 2014, economists have been debating whether the new oil price downturn would evolve with a trend:<ol><li>“V” shaped, as the previous one in 2009 that lasted only two years</li><li>“U” shaped, lasting longer but eventually recovering</li><li>“L” shaped, implying a protracted period of lower oil prices</li></ol>Four years on, the downturn has turned out to be “U” shaped, lasting longer than many had initially anticipated to such an extent that the CEO of BP Bob Dudley repeatedly said the oil prices would have remained “lower for longer”.Forecasting oil prices is inherently difficult as there are several moving parts that can affect the fundamentals of oil supply and demand. In this report, I have analysed the historical mean, high, and low consensus oil price forecasts that Capital IQ has tracked since 2006, to answer the following questions:<ol><li>How accurate have the consensus mean forecasts been in predicting the future oil price?</li><li>How often has the oil price traded within the high and low projected oil price range?</li><li>How many oil price “peaks” and “lows” have been predicted by the consensus forecasts since 2006?</li></ol><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/055/007/original/exh1.png?1528854151" class="editor-image img-responsive" data-smartkarma-image-id="55007"></figure><div class="content-caption">Source: Capital IQ. Data as of 11 June 2018</div>

Since falling to the 12-year minimum of $28 per barrel in January 2016, the Brent crude oil price has climbed by 168% to reach the price of $76.46 per barrel as of the 8th of June. With the global petroleum product inventories expected to normalise to five-year averages in late 2018, the global oil glut that triggered the decline of oil prices in 2014 has effectively been eliminated. As we enter a new oil cycle, market participants have been trying to gauge the direction and shape of the future oil price trend. As shown in Exhibit 1, the current consensus forecasts for the Brent oil price in the next four years range between $60 and $80 per barrel while the forward curve implies a slow decline to $62 per barrel by 2022.How successful have the teams of economists hired by investment banks been to predict the future oil prices?Since the price of oil fell sharply in 2014, economists have been debating whether the new oil price downturn would evolve with a trend:“V” shaped, as the previous one in 2009 that lasted only two years“U” shaped, lasting longer but eventually recovering“L” shaped, implying a protracted period of lower oil pricesFour years on, the downturn has turned out to be “U” shaped, lasting longer than many had initially anticipated to such an extent that the CEO of BP Bob Dudley repeatedly said the oil prices would have remained “lower for longer”.Forecasting oil prices is inherently difficult as there are several moving parts that can affect the fundamentals of oil supply and demand. In this report, I have analysed the historical mean, high, and low consensus oil price forecasts that Capital IQ has tracked since 2006, to answer the following questions:How accurate have the consensus mean forecasts been in predicting the future oil price?How often has the oil price traded within the high and low projected oil price range?How many oil price “peaks” and “lows” have been predicted by the consensus forecasts since 2006?Source: Capital IQ. Data as of 11 June 2018

Three Facts About Oil Price Forecasts Every Investor Should Know