Dueling Price Predictions

I have seen a flurry of recent predictions on oil and gas prices going forward, so I thought I would share some. Most of them support the thesis I recently put forward that we are setting the stage for another run on prices over the next 3-5 years. But with predictions all over the map, it’s no wonder that people are confused.

Miss $4 gas? It’s not coming back any time soon

“For retail prices, I expect we’ll see the national average for regular grade gasoline near $2.25 gallon by the May-June period, and about $2.25 to $2.35 a gallon for the July-August period,” said Brian Milne, refined fuels editor at DTN, an Omaha, Neb.-based commodity tracker.

Brace Yourself (and Your Portfolio) for an Oil Price Shock by 2012 Or Sooner

In his press conference last week, Obama said the country can’t afford to wait to tackle its oil addiction “until the next time that gas gets to $4 a gallon.” But noted consulting firm McKinsey & Co., Saudi oil minister Ali Al-Naimi, and “dean” of oil analysts Charles Maxwell of Weeden & Co. all say that an oil price shock that hits between 2010 and 2013 now appears all-but-inevitable.

So how high does Maxwell see prices going? By the “mid-teen years,” as he put it, the price of a barrel of oil could hit $200 to $300.

Oil May Fall to $28 a Barrel, SocGen Says: Technical Analysis

March 31 (Bloomberg) — Crude oil is set to drop to $28 a barrel in New York in the second quarter, according to technical analysis by Societe Generale SA.

Prices may rally until meeting resistance at $71 a barrel and then plunge to their lowest since 2003, Societe Generale analyst Stephanie Aymes said, using charts that make use of Elliott Wave theory.

Financier sees oil shock from credit crunch

“We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner,” Simmons told Reuters in London.

“These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike,” he said.

Venezuela’s Chavez says $80/bbl fair oil price

Energy Minister Rafael Ramirez in recent weeks said he expected oil prices to stabilize at $70 a barrel, describing that price as the minimum necessary to maintain investments in oil production.

Bernstein Says Oil Will Be $50 in 2009, $80 in 2010

March 31 (Bloomberg) — Crude oil is likely to be $50 in 2009 before falling supply causes prices to increase to $80 next year, Sanford C. Bernstein & Co. analysts said.

“The combination of reduced OPEC volumes and non-OPEC production shut-ins and declines will result in a larger than anticipated reduction in global supply,” Bernstein analysts including Ben Dell said in a report today. That “should help to tighten the oil market in late 2009 and early 2010.”

Oil price is too low to ‘support investment’

Qatar’s Deputy Premier and Energy Minister HE Abdullah bin Hamad Al-Attiyah said the global economic downturn, its impact on a drop in demand and a slide in the price of oil and gas “represent the main challenges facing the oil and gas industry.”

“The slide in oil price for a prolonged period while the cost of projects is not dropping fast enough, will (negatively) affect the volume of investments and threaten stability of the markets in the long-term,” al-Attiyah said.

“The absence of investments in the oil sector and not being optimistic about the future will create a gap between demand and supply,” he added. Al-Attiyah has said that a price above $70 was necessary to encourage investment, a view shared by several other OPEC members.

OPEC president eyes $75 oil this year

LUANDA (Reuters) – Oil prices could reach $75 per barrel in 2009 despite a the economic crisis, OPEC president Angola said on Monday, adding that compliance by the 12-member group with the agreed cuts remained at around 80 percent.

Personally, I think the Elliot Wave guy is way off the mark with his $28 prediction (and I don’t rate technical analyses very highly anyway relative to fundamental analyses). OPEC is showing a fairly high level of compliance with respect to the announced cuts. When members have visions of $100+ oil prices dancing in their heads, it is probably a bit easier to get them to comply while oil is bouncing around $50. Combine that with lots of project cancellations, and higher prices are in the cards.

I think the Bernstein analyst hit closest to the mark. OPEC is likely to overshoot with their cuts (just as they did last time) and not react until prices are much higher. By the time they do start to react, project cancellations will start to become a factor, and supply will once again be pinched. I would personally put the odds of higher prices in 3 years at 90%, with a better than 50% chance that they will be back over $100.

8 thoughts on “Dueling Price Predictions”

  1. Elliot Wave!?! Must be the same guy who figured they had eliminated risk out of the financial markets. That also worked great, for a while…

  2. I’m quite familiar with Elliot Wave, and find it to be an excellent system for predicting the past. Predicting the future is where it is less useful.

    As I see it, the multitude of widely divergent predictions comes from two fundamental facts of energy prices:
    (1) they are volatile, and
    (2) no one has a clue what will happen next.

    There are so many factors which could move the price of oil to one extreme or the other, and they are inherently unpredictable. Will there be major technological innovations? how quickly would they be adopted? What will producing countries’ governments do? What will consuming countries’ governments do? Will there be any governmental upheavals (Venezuela, Iran, Iraq, Saudi Arabia)? Will the economies grow? Where will the growth occur? And many, many more.

    We all make predictions and some of us will be right. But it doesn’t necessarily mean that we saw things any better than others – it’s just that, when so many make predictions, somebody has to get it right. I didn’t predict this year’s Final Four in NCAA basketball, but some people surely did, and blind luck is the major factor in their success no matter what they think.

  3. It is now obvious that $147 oil last summer was not caused by supply and demand, but by speculation and the very weak U.S. dollar at the time. Nothing else explains the huge 6-month downslope from $147 to this past winter’s $30 oil. Same with natural gas. The question then becomes .. if prices rise again this summer, is it because of actual supply and demand issues, or because of speculation and the weak dollar again? I doubt it will go to $100+ again this year, as the speculators have no borrowed money to use to bid up prices again, and the dollar seems to continue to be strong as people fee to U.S. investment safety and the short covering continues.

  4. This is why you need to look at excess capacity when considering prices:

    Venezuela defies OPEC

    Chavez is happy to call for OPEC production cuts as long as it comes out of the Saudi’s share. After all, Chavez needs the money to fund his revolution.

    It probably doesn’t make much of a difference since Venezuela has been badly managing its production anyway. But it is humorous.

  5. It is now obvious that $147 oil last summer was not caused by supply and demand, but by speculation and the very weak U.S. dollar at the time.
    Obvious, eh? I must be slow. Explain to me how it is so obvious.

    Nothing else explains the huge 6-month downslope from $147 to this past winter’s $30 oil.
    Nothing, like never, is a loaded word. Here goes nothing: Background: The oil market is an interesting one, in parts it is essentially a free market, much more than say agriculture. Yet, thanks to OPEC’s efforts it is a distorted free market at best. Apart from their usual effort, OPEC also encourages secrecy, which is something that by itself would add volatility to the best of free markets.

    Start with growing demand, met by static supply. It had been going on for three years, but it was only last summer that the markets woke up to this. BTW, note that OPEC was unable to calm the markets by staying ahead of demand. So, has OPEC lost its ability to control maximum oil prices?

    Why the lag? Let’s assume nothing untoward, until somebody proves otherwise. After all, it takes time to respond to information.

    Well, even as the markets were responding to what had happened the previous three years, demand was probably softening. By the time Uncle Sam stepped in and started bailing out banks, it was obvious that we were on the cusp of a severe recession, and that oil demand was dropping like a rock. Hence the sudden change in direction on oil pricing.

    BTW #2, notice that this time OPEC was unable to cut production fast enough to support oil prices. This leads one to wonder about OPEC: unable to reign in prices on the up, and unable to support them on the down… Of course, OPEC is hardly powerless, but perhaps not as all powerful as some would have us believe.

    So there you have it: oil price volatility as a function of market conditions, with not a speculator to be seen. Speculators, of course, try to benefit from the volatility. But even so, they are taking advantage of volatility (and some would argue reduce it by doing so) not causing it.

  6. Here are some other folks who don’t think it’s obvious that speculation is the key driver of oil prices.

    Deutsche Bank:

    “The rally in non-exchange traded commodity prices since the end of 2002 has been similar if not greater in magnitude,” the bank’s analysts wrote in a research note. “We believe this refutes the claim that speculators have been the primary drivers of rising commodity prices during this cycle.”

    The International Energy Agency, CNN Money, July 1, 2008:

    “There is little evidence that large investment flows into the futures market are causing an imbalance between supply and demand, and are therefore contributing to high oil prices,” the report said.

    Instead, the IEA put the blame for higher crude prices squarely on strong growth in demand coupled with limited growth in supply.

    “If supply is constrained and demand is increasing, prices have to rise,” read the report.

    The IEA argues that if speculation drives prices too high, the market would be unbalanced. Either demand would fall off, or stockpiles would rise. Neither has happened.

    Commodity Futures Trading Commission:

    Economists at the CFTC have testified that after studying all the numbers on who is trading what, there is no evidence speculators of any kind are significantly driving up the price of crude.

    In the time that the price of a futures contract for oil increased from about $75 to $130 per barrel (ending June 18), net speculative positions decreased from slightly above 6% of open interest to slightly under 4%.

    Société Générale:

    ‘You can’t just point the finger at speculators,” said Michael Haigh, head of U.S. commodities research at the investment bank Société Générale and a former economist at the CFTC. “Fundamentally, the markets are where they are supposed to be.”

    Haigh said that big-money funds are not just dumping their money onto the market – only betting prices will go up. He and others say these funds are sophisticated investors and take a variety of positions in the market.

    PFC Consultancy:

    There is only one type of customer for crude: refineries. If speculators on the futures markets get carried away, pushing prices so high that refineries run at a loss, they will simply shut down, causing the price to fall again. Moreover, speculators do not always assume that prices will rise. As recently as last year, the speculative bears on NYMEX outweighed the bulls.


    PIMCO argues against speculation as an important factor in oil’s rise and in looking for culprits says that even index funds make unlikely suspects. For one thing, they too invest in futures, rather than in physical supplies of oil. So every month, they must trade contracts that are about to fall due for ones that will not mature for several months. That makes them big sellers of oil for prompt delivery.

    Barclay’s Bank:

    The total value of index funds and other similar investments are estimated at $225 billion. That is less than half the market capitalisation of Exxon Mobil, and a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year.

  7. Thanks Armchair,
    Good to see the arguments and data.

    Unfortunately, when people don’t understand something, or are unwilling to accept the obvious (in this case: it’s the market, working as it’s supposed to), they resort to interesting brain gymnastics, like conspiracy theories and Elliot Waves.

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