Oil-exporting country predictions of the price of oil has been way off in recent years, as changing dynamics within the industry as well as global forces begin to reshape the industry. While predictions from oil producing countries have enjoyed a poor track record, institutional forecasts have improved. Oversupply remains a key concern, however, with the low oil price (<$50) making almost half of US production unfeasible.
The price of oil has been making headlines since its massive – and now sustained – plummet from $115 a barrel heights, to sub-$30 lows at the end of last year. The effects of the low price has a broad range of implications; oil producing countries have seen significant falls in revenues, while oil dependent countries are enjoying respite. Energy companies, with many dependent on oil prices above a certain level for sustainable operations, are in trouble – the US has already shed more than 250,000 jobs from the industry, while a wave of consolidation is predicted by some for the coming year. Consumers are enjoying a considerable drop in the cost of living, which, however, has a deflationary effect – forcing changes in monetary policy in an already fragile environment.
While the oil price averaged $49 a barrel in 2015, correctly predicating its future movements has become a priority for countries and businesses whose existence is dependent on the liquid. In a new report from Roland Berger, titled ‘2016 oil price forecast: who predicts best?’, the consultancy firm sought to identify the prediction trend made by countries as well as institutions, to gauge the direction of the oil price in the coming term – as well as consider the key factors that may come to influence its movements.
Getting it wrong
Analysis of the predictions made by oil producing countries, in their yearly budgets, found that the top three predicting countries; Nigeria, Saudi Arabia and Mexico, had an accuracy 96% between 1999 and 2014. While three large energy institutions, the NYMEX, EIA, and IEA, had an accuracy of 53%.
Recent years, and in particular 2015, have seen considerable changes to the energy market – which has seen the tables turn on predictability – and since 2010 the institutions have tended to be more accurate. In 2015, every country (including the top three) were well above the actual price of $49 a barrel. Nigeria was 76% above the mark at $86 a barrel, while Saudi Arabia came in at $90 a barrel. Mexico’s prediction was the furthest off, out by 126% at $110 a barrel. The accuracy of the institutions’ was out by between 41% and 61%, with the closest prediction $69 a barrel.
A number of factors have influenced the market in recent years. The USA has, since the shale gas boom, seen its production explode. Since producing 8 million barrels per day in 2009, production has ramped up to 14 million in 2015 – the country becoming the largest producer 2012 onward. Following the boom in production by the US, there also is a significant increase in the export of petroleum products from the country, up from just under 2 million barrels a day in 2007 to around 5 million in 2015. Recent changes have further added to global crude supply, with US companies now permitted to sell its crude on the market.
The large increase in production by the US, as well as changes in the market dynamics as particularly Saudi Arabia increased supply in recent years, have seen a large spike in supply while demand has remained relatively stable – on average there is an oversupply of $1.8 million barrels per day.
Past drops in oil price could be attributed to recessions, where demand dropped off while supply remained stable; instances include the 1998 Asian financial crisis, 2001 tech bubble burst and the 2009 global financial crisis. The current drop of the oil price, starting 2014, is not caused by a recession, however, but by oversupply - causing the oil price to reach its lowest level since 13 years. The causes are similar to the 1986 oil shock, which followed from a large increase in OPEC production, with oversupply pushing down prices to some of the lowest seen in almost a decade.
Predicting the future
Predictions for the coming year are relatively variable, but place the average value of oil close to $50 a barrel. The countries that historically were the most accurate predict prices equal to, or below, between $61 and $48 a barrel, with the average across all oil producing countries coming in at between $38 and $53 a barrel. The institutions predict that the average price for oil in 2016 will be around $46.
Controlling the future
According to the consultancy, a number of factors will bear on the prediction for the coming year. One major factor is related to production in the US. The low oil price is placing considerable pressure on the country’s domestic oil industry, with 50% of production not viable below $50 a barrel. If production in a range of types and geographies slows or halts, the effect may be that more than 4 million barrels a day will be slashed from the global market place, further aligning supply and demand. However, with the cost of OPEC production still below the cost of oil, and continued stagnant demand – the current low oil price environment may be here to stay for at least the coming year.
OPEC's move to continue releasing its oil, resulting in oversupply, is also likely to further affect all oil producing countries – with the likes of Russia, Saudi Arabia and Venezuela already seeing significant fiscal contractions following the massive price drop. Saudi Arabia’s continued high supply rate however, is likely a means of controlling its market share in the face of increased US supply – forcing much of that supply off the market to be replaced by its own cheap, but still profitable, supply. Yet the strain on Saudi Arabia’s budget may – in the coming year – force its hand to lower supply, which could result in pricier oil.