It has been a rough 2 years for forecasters of crude oil prices. Essentially no one saw the 2014 crash coming, and everyone looked on in surprise as a barrel of crude oil tanked, from over $100 to less than $30. After the crash, many forecasters expected a speedy recovery driven by bankruptcies in U.S. Shale, only to be left surprised again by the slow pace of the structural adjustment of supply to demand, causing the crude oil price to remain in the $30 to $50 per barrel range much longer than anticipated. And now, just as everyone has begun forecasting “lower for longer”, crude oil seems to be breaking through the $50 per barrel range in response to the announcement that OPEC and Russia intend to cut production.
All these surprises did not happen because crude oil price forecasters are “quacks” and “charlatans” who don’t really know what they are doing. Rather, the issue is the large number of real world factors that impact the crude oil price –
Clearly, this makes crude oil price forecasting exceptionally difficult. That does not mean, however, there is no value in doing it.
If it hadn’t been for crude oil price forecasts the world wouldn’t have known about many of the factors impacting the crude oil price. The reconciliation of the forecast and the actual price of crude oil often results in learning about new things with implications for the crude oil price, new factors which had not been considered before. U.S. shale’s ability to
That this enhanced understanding of how the world of crude oil works has not resulted in increased accuracy of crude oil price forecasting, is because the world continues to increase in
With the value of crude oil price forecasting firmly established, we will continue to monitor the global crude oil market to assess how events and trends will be impacting the crude oil price. At present we are bearish for crude oil, as we believe the following factors will be driving the oil prices in the short to medium term.
(Click to enlarge)
The countries united in OPEC at present account for approximately one third of global crude oil production, giving the OPEC cartel significant ability to influence crude oil supply and market sentiment. The recent announcement of an agreement to cut production sometime in November 2016 effectively signaled a change in course. Since 2014 OPEC’s strategy had been to “
OPEC’s ability to deliver on this strategy remains doubtful. The
If an agreement is established, the cartel’s history of members
There is also the question of how much exactly an agreed production cut will impact the number of barrels supplied to the international markets. For example, during summer Saudi Arabia uses over 1.0 million barrels of crude oil for
The crude oil price seems to have already
Global Economic Growth
The two-way relationship between economic growth and energy demand, and by extension crude oil demand, is well established. As economies grow they tend use more energy. Conversely, the availability of (cheap) energy enables economies to grow. For this reason global economic growth forecasts feature prominently in crude oil demand forecasts.
The fact that global economic growth has consistently been
A consensus seems building amongst economists that in the short to medium term, global economic growth will be less than what the world got used to in the post WWII period. The IMF, for example, has warned for a coming period of
But even mediocre growth is under threat, and thus also even the least optimistic of crude oil demand growth forecasts.
Many of the globe’s key economies are struggling. In Japan
Hanging over all of this like a thick dark cloud is a global debt which has reached
As energy efficiency is becoming more and more a focus area of governments around the world, reducing the impact of economic growth on crude oil demand growth, there is a high probability that crude oil demand growth will continue to disappoint, which would keep the price locked at around $50 per barrel, the
Chinese Oil Demand
China was instrumental in the crude oil supercycle that lasted from 1999 to 2014, as during that period
Although growth of the Chinese economy has slowed down over recent years, Chinese crude oil demand has continued to grow at the previous pace. This is because China has been using the low oil price environment to fill up strategic and commercial storage. According to some, China has been buying
Obviously, this demand can not last forever as at some point China’s storage capacity will be full.
Technological Innovation & Process Optimization
At the beginning of 2015,
While some of the
Crude oil has been a remarkably stable industry for most of its existence. While the technologies applied to finding, developing and processing crude oil have indeed changed substantially, the products itself was never seriously challenged by outsiders, i.e. by new solutions for humanity’s energy need. Until recently, that is.
Under the influence of factors such as emission control regulation, changes in consumer preferences, digitalization and urbanization, the
Opposite these substantial downside risks for the crude oil price we see just two factors that bring an upside potential, namely Upstream underspending and geopolitical risks.
Major cutbacks in
The global average for
The war in Yemen is a geopolitical conflict with the potential to impact the crude oil price in the short to medium term, for two reasons.
Firstly, Yemen itself borders a key transport route for crude oil. Some
Secondly, behind the war in Yemen is a
Other geopolitical events with a more remote likelihood of impacting the global oil markets are Iraq, in particular the
By Andreas de Vries & Salman Ghouri for Oilprice.com
More Top Reads From Oilprice.com: