The global oil price has fallen significantly since 2014, as demand growth faltered and the addition of supply from US shale and Middle Eastern markets have led to a period of oil glut. The predictions of countries and key institutions about the movement of oil has, in light of changes, suffered. Last year, institutions were considerably more accurate than oil producing countries; institutions have been more accurate on average since 2008. Going into 2017, institutions predict an oil price of $50 on average, while the top three most accurate countries for predictions point at $55 a barrel.
The price of WTI crude has fallen steeply, following a string of years of spikes above $100 a barrel, to lows not seen since the deep point of the financial crisis. Prices during 2015 averaged $49 per barrel, while last year the average stood at $43 a barrel. The price of oil remains, for the time being at least, an important indicator for sectors and businesses – getting the forecast generally accurate provides many with a background against which to make strategic decisions.
Each year a range of institutions and countries create forecasts, from a host of background information, about where the average oil price for the year ahead will fall. Roland Berger, in its '2017 oil price forecast: who predicts best?' information document, considers the accuracy of that forecast against the eventual reality.
While the forecasts for 2015 were a rout, with the average forecast out by around $65 a barrel, the 2016 forecast tended to be more accurate. Iran and Kuwait were the most accurate last year, predicting the eventual price within 1%. The top three most accurate forecasters between 1999 and 2016, Iraq, Nigeria and Saudi Arabia, were out by 12%, 15% and 16% respectively – each predicting a higher price. Venezuela, potentially for political reasons, was out by 75%, predicting a price of $75 on average.
Key institutions’ predictions of the oil price for 2016 tended to be more accurate than countries. The NYMEX was out by 2%, predicting $42 on average, while the OECD was out by 3%, predicting $45 a barrel. The EIA was the most inaccurate of the three institutions covered, predicting $39, thus out by 11%.
The research also looked at the trend for forecasting accuracy between the top three countries and the three institutions. The analysis shows that a shift has taken place: the top three countries’ predictions have since the financial crisis become wildly less accurate, while that of institutions have becoming increasingly accurate.
In the years since the start of the crisis, 2009-2016 compared to the period 2002-2008, the research shows that institutions have seen their accuracy fall from out by 17% to out by 12%, while countries have since seen their inaccuracy increase, from out by 12% to out by 28%. Roland Berger Partner David Frans explains that a key reason for the shift is that "It appears that the oil-producing countries have less influence on the oil price since the rise of shale gas in the US. As a result, their forecasts, compared to the institutes', have become less accurate."
The research considered the key trends in supply which are implicated in the current lower price per barrel of WTI crude. The firm shows that, since 2014 global supply have outstripped global demand, creating an oil glut and a reduction in the price.
The net oversupply has been considerable at between 1.5 million barrels per day and 2.6 million barrels per day between the last quarter of 2014 and the first quarter of 2016. While last year there was a brief period in which demand caught up to supply, the trend reversed again in the last months of last year as Iran’s production hit the global market and demand again fell.
The continued production from the US, which is now one of the world’s largest producers, the addition of Iran as well as continued reduction in demand as the global energy system transforms, have together contributed to a continued lower oil price environment without a large negative GDP factor – no recession.
Oil price predictions for 2017
The predictions from the top three predicting counties and the three institutions, forecast that the year-averaged price of oil will rise in 2017 compared to the year previous. As of December 2016, the price of WTI oil stood at $52 a barrel, this is expected to fall slightly by institutions to an average of $50 a barrel across this year. The OECD predicts it will fall slightly however on last year’s average of $43, to $41.
The three countries are predicting the price to be somewhat higher than in 2016, Saudi Arabia for instance, predicts $72 a barrel, while Nigeria, $52. Iraq foresees the price to come in lower than last year, at $42 per barrel.
Frans reflects that the situation today is similar to that of 1986, "The oil price was low back then, too, and was also the result of oversupply. Today we're seeing growing market shares for Russia and the Middle East, and declining costs for American shale gas. I'm seeing a trend where the oil price could stay relatively low for much longer. Last November's OPEC agreement to limit production so that the price could rise could very well be negated by the increased production of shale gas in the United States."