Forecasting oil prices is a mug’s game
Educated guesses about oil prices are essential to effective planning.
By ATB Economics 3 April 2020 1 min read
When asked where oil prices are headed, ATB’s Chief Economist Todd Hirsch has been known to joke around by responding “somewhere between zero and 100.” Joking aside, Todd’s answer points to the inherent difficulty of forecasting a highly volatile commodity like crude oil.
This does not mean we shouldn’t try. Educated guesses about oil prices are essential to effective planning.
What it does mean is that we shouldn’t get too attached to our assumptions and the forecasts they yield. In this sense, humility in the face of the complex array of factors that lead a particular buyer at a particular time to say “I’ll give you this much for that barrel of oil” is probably just as important as a deep understanding of things like rig counts, storage levels and geopolitical events.
The current challenges associated with forecasting oil prices are a case in point.
Back in January when the idea of cancelling hockey games would have been laughed at, the U.S. Energy Information Administration’s (EIA) forecast for the average price of a barrel of West Texas Intermediate crude in 2020 was 59 U.S. dollars.
Fast forward to March 11, and the EIA dropped it’s forecast to $38. The world had changed dramatically with COVID-19 suppressing oil demand and an unexpected price war between Russia and Saudi Arabia threatening to flood the market. The EIA hasn’t released its April update, but it’s likely to be even lower.
However, if President Trump’s tweets about a possible deal between Saudi Arabia and Russia turn out to be prophetic, this will no doubt affect the next round of forecasts. But a deal is not a certainty and greater-than-expected demand destruction caused by the pandemic may offset the positive effects of new supply cuts. We just don’t know.
And there’s the rub. We just don’t know.
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