There is only one sure thing when it comes to oil price forecasting—forecasts will inevitably prove to be wrong.
If it’s not too high, it’s certainly too low—at any rate, it’s never just right, because the odds that a forecaster, of all the possible numbers available, picked exactly the right number are literally one in infinity. This makes oil price analysis and forecasting a rather hopeless, and likely thankless, job. The only thing those analysts have to look forward to is being wrong—at best, they can look forward to being less wrong than their peers.
Today’s market volatility is making even the savviest analyst leery of rubber stamping any given figure. We have the U.S./Iran debacle. The U.S./China debacle, the PDVSA debacle, and the Libya debacle. We have fights in Sudan/South Sudan over who’s got the oil and who can move it. Spatting between Iraq and the Kurds, Canada’s pipeline constraints, inventory surpluses, inventory crunches, too much capacity, not enough capacity, underinvestment in developing more reserves, seller’s alliances, buyer’s alliances, climate lawsuits and divestment crusades, and electric vehicle progress or lack thereof. Corn and various biofuel regulations. And rounding out this list are analyst forecasts, which also give rise to volatility, even if unintentionally. Related: Are Bionic Cells The Future Of Solar?
But this volatility, and the decreased likelihood that anyone will be able to predict the future price of oil, has not resulted in any shortage of opinions on the subject. Below are some of today’s oil price forecasts and the method behind them, all the way from the safe to the out-on-a-limb prediction. Some contain actual price predictions, while others, thrown in for good measure, contain generalized market outcomes.
Closure At the Strait of Hormuz To Catapult Oil Prices to $250
Let’s start with the most bullish case for oil. Vladimir Rojankovski, expert at the International Financial Center in Moscow, predicts that oil prices could surge to $160 per barrel if Iran were to disallow oil transit through the busy Strait of Hormuz—a waterway responsible for a massive share of the world’s oil. If the Strait was closed for a month or two, the analyst predicts, panic could ensue, sending prices upwards even further, to $250 per barrel, the RT reports. While the likelihood that Iran would or could make good on its threat to close off the shipping lane is slim, it would indeed—if successful—send shockwaves through the oil market, lifting prices.
Rojankovski is not alone in his forecast. The RT cites yet another analyst—this time from TeleTrade—who also feels that oil could see $250/barrel if Iran were to block off the Strait.
Underinvestment in Oil Will Cause A Super-Spike
Investment Management Company Sanford C. Bernstein & Co. sees not Iran, but underinvestment in the oil industry, as the catalyst for sending crude oil prices upwards of $150. Coming out of the oil crisis a few years ago, oil companies have had to focus on shareholder returns to keep them happy—at the expense of investing further in its business, Bernstein analyst Neil Beveridge wrote in early July. The lowered reinvestment ratio fell to the lowest level in a generation, says Beveridge, according to Bloomberg. “Investors who had egged on management teams to reign in capex and return cash will lament the underinvestment in the industry,” Beveridge wrote. “Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008.”
U.S./Iran Drama To Bring On $100 Oil
Forbes last week cited Athens-based shipping expert Theo Matsopoulos, who suggested that a “military accident” in the Arabian Gulf, stemming from the tensions between Iran and the United States over the sanctions, could cause the oil supply to be “seriously disrupted”. This analyst, however, has a different spin on the Iran scenario presented by Rojankovski.
“When the markets are in critical point they are more sensitive, and they translate facts more violently than they would during times of stability. It is not necessary for the Strait of Hormuz to be fully blocked, as happened in the Suez Canal in 1956. The expectation of a blockade and the potential for disruption could cause turbulence and shape a bullish market for crude oil,” Matsopoulos said.
Forbes predicts that this disruption, even shy of a blockade of the Strait, could send oil above $100.
Morgan Stanley Sees Supply Crunch And $85 Oil
Morgan Stanley raised last week its price forecast for Brent crude by $7.50 per barrel to $85 on the back of diminishing oil supplies as the U.S. stance on Iran oil exports was tougher than many had expected, and as Libya’s and Angola’s oil production slipped. The investment bank does not think Russia and OPEC will be able to offset those market shortages.
Goldman Dismisses Trade War Fears
Goldman Sachs has long been bullish on oil, and even in the face of US sanctions on Iran, and the China/US trade war, Goldman is sticking by its earlier forecast, writes Nick Cunningham for Oil Price. Goldman had previously pegged oil in the low $80s. More recently, Goldman doubled down on its prediction, saying that concerns about oil had been “oversold”, and was expecting depleting inventories in the energy market to keep prices higher.
The Safe $65/$70 Scenario
Neither bullish nor bearish, Barclays modestly raised last week its oil price forecasts for Brent and WTI for this year and next. The U.S. benchmark is expected to average $65 a barrel in 2019, with lower oil supplies from Iran and Libya tightening the oil market further. “Due to new outages and a quicker Iran supply reduction, we see Brent and WTI prices averaging $71 per barrel and $65 per barrel next year,” said Barclays, cited by Reuters.
Related: Record Oil Production Doesn’t Free U.S. From Global Market
In near lockstep, JP Morgan raised its WTI/Brent outlook late last week as well, to nearly the same figure. For Brent crude, JP is predicting $70 for this year and next. While a seemingly moderate prediction, what with Brent trading around $75 currently, the prediction is $10 per barrel above an earlier forecast it had made. JP’s prediction was not based on any catastrophic geopolitical event. Instead, “Uncertainty around actual OPEC production increases, current budget constraints and sanction effects could mean near-term oil prices remain elevated,” JP Morgan’s equity research team said in a note cited by Reuters. According to JPM, oil prices would be capped by increases in spare OPEC production capacity and short-cycle US shale well economics, combined with what it sees as a lowered demand growth for this year and next.
Other analysts share similar middle-of-the-road opinions that see oil within $10 of where it trades today, including BMI Research, which sees Brent at $75 for 2018 and $80 for 2019.
Russia Predicts A New Oil Price Collapse
Breaking away from the pack, the Russian Finance ministry predicts that there will be a new oil price collapse should oil prices remain above $50-60 per barrel, according to a report seen by Sputnik. Today’s oil prices, which it argues are above the long-term equilibrium levels, will cause the price collapse to repeat, the ministry warned.
Besides Russia, there aren’t many other analysts calling for a collapse, although there are market forces at work that could drag oil prices lower, such as the United States unleashing barrels from its Strategic Petroleum Reserve and the perception that Saudi Arabia, Russia, and the United States have enough spare capacity to comfortably keep the world in oil.
By Julianne Geiger for Oilprice.com
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A threat of a closure of the Strait of Hormuz is often cited as a cause of a steep spike in oil prices. After all 20% of the global oil supplies pass through the Strait daily. However, the Strait at its narrowest point is 34 mile wide so it is impossible militarily to close it completely. What Iran can do is mining it stealthily with the expectation of a mine hitting an oil tanker and sinking it. Such an accident in itself would deter tankers from crossing the Strait thus causing a disruption in oil supplies until the mines are cleared. Alternatively, Iran could threaten sinking tankers crossing the Strait even if escorted by the US Fifth Navy in the Gulf. This threat might deter tanker owners around the world from sending their tankers across the Strait under pressure from global insurance companies until tension has subsided. In this way, Iran would have achieved its goal of disrupting oil supplies peacefully.
As a result oil prices could spike steeply for a short period of time until the mines are cleared or until tensions have subsided.
The threat to oil supplies and the risk of a steep spike in oil prices might emanate from a lack of investments in oil exploration globally and lack of oil production expansion. Nobody is paying enough attention to the fast-approaching oil supply gap probably as early as 2020. This is due in large part to an oil investment drought marked by three years of consecutive decline in oil prices with the rate of new oil discoveries is at its lowest level in more than 70 years according to the IEA.
By 2020, 15 mbd of new oil supply may be needed to meet a projected annual average rise in global oil demand of 1.59 mbd and also offset an annual natural depletion rate in global oil production estimated by the IEA at 5% or 4.8 mbd, virtually equivalent to losing the current output of Iraq.
A lack of investment will cause oil production to decline steeply and 80% of the current new oil supply is needed to offset natural declines.
And while a brewing trade war between China and the United States could cast dark shadows over the global economy, it will not damage the global trade unless both countries come to blows, something unfathomable. Still, what China can’t sell in the US market, it will try to sell around the world. The Chinese economy will, therefore, still need growing volumes of oil imports to keep functioning. So the impact of a trade war between China and the US on oil prices will be insignificant.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London