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Lucky or wrong

Published Friday, March 6th, 2015

There will be many of you reading this report who are being asked by their boards, managements, families and friends where are oil prices going. Should they build a refinery, buy storage, dig a hole and look for shale, reinstall oil and abandon their pellet boiler, tear down their wind turbine, smash their solar panels, are their assets stranded? The questions keep coming, to which you should answer “I am only an oil man which means I know too much and therefore I can’t decide whether it is going up or down”. I think this today, but I might think differently tomorrow.

Which leads on to the perils of forecasting. “Those who have knowledge do not predict. Those who predict don’t have knowledge”. “Wall Street predicted nine out of the last five recessions”. “There are two types of forecasts … lucky and wrong”. You will all have heard these and many other quotes in a similar vein. Who can forget Goldman predicting $200 bbl oil one minute and warning of a price Armageddon the next or, in the last few months, Citi, Barclays et al nonchalantly revising price forecasts down by a cool $40 to $50 bbl almost overnight?

We have commented many times how difficult oil forecasting is with so many variables to consider that impact on both the demand and supply side of the oil balance. A 1% error in demand is worth +/- 900,000 bpd and a 1% error on non-OPEC supply is worth +/- 600,000 bpd. Overestimate global demand and underestimate non-OPEC supply by 1% and you have an additional supply boost of 1.5 mbpd and vice versa.

to read the rest of the report, please click here

Posted by David Hufton