In the world of energy, oil price forecasts are rolling out faster than one can digest them. In fact, there are so many that we only seem to pay attention to those who shout the loudest, are associated with a prominent name, or are the most outrageous.
For example, Dennis Gartman, the publisher of a well-known commodity trading newsletter sporting his name, recently proclaimed that crude oil will never trade back above $44 a barrel “in my lifetime.” We wondered if he might be suffering from an incurable disease and knew the date of his demise. Then again, he is trying to sell newsletter subscriptions.
Within days of Gartman’s claim, Goldman Sachs predicted oil prices could fall to $20 per barrel. That is the level, in their opinion, at which producers face operational stress and are forced to shut down production easing the global oversupply of the gooey stuff.
Just 10 months ago, Gartman said that oil prices could sink as low as $15 a barrel before this cycle was over. He is now being outbid by economists saying the oil price bottom will be closer to $10 or even $5 a barrel. Shockingly, we actually saw a producer in the Bakken region pay a refiner to take some of his crude oil! So oil could actually have a negative value? That will make environmentalists happy.
Some forecasters continue to call for crude oil prices to be above $60 a barrel before the end of this year, and even higher in 2017. Hallelujah! Can we make it to then, or will the $60 forecast prove to be a mirage in our oil industry desert?
As we contemplate these oil price forecasts, we are reminded of Stanford University economics professor Ezra Solomon’s comment: “The only function of economic forecasting is to make astrology look respectable.”
Saudi Arabia may be making forecasters look bad. On Nov. 28, 2014, the kingdom threw up its hands and resigned to let the market set the price. Forecasters had confidently predicted a Saudi-led OPEC production cut would support prices. Oh, well.
Throughout 2015, forecasters predicted that oil prices would never go below $50, then $40, and finally $30 a barrel, but all those levels were breached. Oil in the $20 range? Why that would never happen — but it did, just last week! Now, anytime a forecaster hears a comment from a Saudi official, it is interpreted to mean that they are ready to help stabilize the oil market and boost prices. Then again, maybe not. It is hard to see head fakes under those keffiyehs.
Oil price forecasts are only as good as the assumptions underlying them. The big question now is whether we are caught up in a Black Swan moment when everything we thought we knew about how the oil markets work or how the Saudis feel about oil actually is wrong. Black Swans, by definition, are unpredictable and impossible to forecast. Moreover, we have no idea of their unintended consequences. If we are in a Black Swan world, being curious, cautious, and conservative are personal characteristics to prize.
Who knows how bad this gets, how long it lasts, or – quite possibly – if we might be catapulted to new heights by the end of the year?
To survive, we suggest you adhere to the advice of British writer Rudyard Kipling in his poem, “If –”: “If you can keep your head when all about you are losing theirs … / Yours is the Earth and everything that’s in it/ and—which is more—you’ll be a Man, my son!”
For those who haven’t lived through past cycles, surviving this one will make you a man.
The views and opinions expressed in this blog are the author's and not necessarily those of WorkBoat.