The oil market appeared to have weathered the storm of the 2015 price collapse and had responded with considerable accomplishments. By November 2017, domestic crude oil production had recorded its highest level in U.S. history. International trade in crude oil and petroleum products was booming with exports of 6.6 million and imports of 10.3 million barrels per day in January 2018. New and substantial oil discoveries were being made from international offshore oil fields, and the average price of Brent stood at US$57.05 for 2019 (EIA 2018, Statista 2020).
Key energy think-tanks, oil trading companies, and financial services firms such as the US Energy Information Administration (EIA) and Fitch Solutions were convinced that Brent crude price could average US$61+ per barrel in 2020; seeing the year open with a price of roughly US$66.25 per barrel (Ross 2018; EIA 2020; Fitch 2020).
When all seem to be going well, boom! Things changed!!
That in a matter of 3 months, the price of Brent dropped over 55 percent from US$68.60 per barrel price recorded on January 03 to US$22.76 per barrel on March 30. And after struggling to rise to US$34.11 per barrel in early April, it took another nose dive to trade below US$20 per barrel on April 21.
Errors and Recalibrations
The current price slump is happening against price directions as forecasted by investment houses, oil majors, banks, research analysts and consultants, with contrasts in judgments wide and disheartening. And there are records of a long sequence of errors made by price forecasters, including the market crash of 1982 and 1986, and the commodity boom of 2008 which others predicted that it could reach $200 per barrel by 2020.
Now the group is forced to recalibrate their forecasts after failed price expectations in 2020. For instance, the asset management firm JP Morgan cuts its outlook for oil, suggesting that Brent could drop to US$17, after predicting in December 2020 that Brent will average US$64.50 per barrel in 2020. The U.S. Energy Information Administration (EIA) have also lowered its 2020 forecast for both West Texas Intermediate (WTI) and Brent, according to its Short-term Energy Outlook report released April 07; suggesting that Brent prices will average $33.04 per barrel for 2020. And Goldman Sachs is compelled to lower its earlier forecast of US$63.00 per barrel for 2020 to US$20 per barrel for both WTI and Brent in the second quarter of 2020.
With these new predictions, the forecasting fraternity still cautions that their projections might not turn out right because there could be a lot of market uncertainties this year that could tip oil prices either way. And so, for those that depend on oil price forecasts to make decisions in various ways, this is a catastrophe.
The use of crude oil is a necessary part of the modern world, and prices have a big impact on global markets and economies, prices of petroleum products, as well as oil exploration and exploitation activities. As a result, reliable forecasts of oil prices remain very useful to various economic agents. It is vital for firms whose business considerably depends oil prices, like oil companies that need to decide whether or not to drill new wells, airline companies to plan routes and set airfares, and automobile firms to plan production.
It is equally important for governments, business economists and commodity traders whose routine occupation is to churn out predictions of industry-level, and aggregate economic activities. It also helps various industries and households in making decisions on durable goods purchases, like motor vehicles, furnaces, and other appliances.
Major Problem
The price of this vital commodity used to have a predictable seasonal swing; spiking in the spring as oil traders anticipated high demand for summer vacation driving, and prices dropping in the fall and winter once demand peaked. But the oil industry have changed in a number of ways, so oil prices are no longer as predictable as it used to be. Not even the many advanced tools developed for predicting oil prices, including linear and non-linear models; could stop oil analysts and forecasters from frequently and frantically revising their market projections as the price keeps upturning expectations.
The high volatility of oil prices remains one of the most challenging forecasting problems, with the industry often threatened by new incidents, wrong presumptions, and restricted information. The volatility exists because many different players like world leaders, cartels, speculators, and global investors; seek to influence the price on a daily basis, the easily tradable and storable commodity.
Price Influencers
The price movements of crude oil are disposed to varied influencing factors; with the primary ones being supply, demand, and market sentiments. Commodities and financial market happenings, geopolitical events, infrastructure constraints, speculation, regulations, policies, alternative fuel sources, arm conflict, natural and man-made disasters, and technology remain as dictates. And the dynamic and complexed movements between these factors ends in the strange performance of the crude price movement.
For instance, between 2000 and 2008, oil witnessed an unprecedented surge in price, from around US$25 per barrel to nearly US$150 per barrel. This has been attributed to the increasing demand in emerging economies like China and India, with production cuts by the Organization of Petroleum Exporting Countries (OPEC) driving price to its record heights. However, the 2008 global financial crisis impacted negatively on oil just like other commodity market, as the price of a barrel of crude fell from a high of US$147 in mid-2008 to a low of US$33 in February 2009 as a result of diminishing demand in economies of the major Western countries.
2012 witnessed another dramatic increases in oil price when the U.S. and the European Union (EU) began financial sanctions against Iran for coming closer to building nuclear weapon muscles. Iran responded with a threat to close the Strait of Hormuz, and the U.S. also threatened to open the canal with military force should Iran go ahead with their claim. What followed the banter was oil price breaking above US$100 per barrel as traders worried the crisis could limit supply.
The initial plunge in crude prices from June 2014 to early 2015 was attributed to supply factors, including booming U.S. shale oil production influenced by the advancement in Horizontal Drilling and Hydraulic Fracturing technologies, and deteriorating demand prospects in economies such as China, which is the world’s largest country by population.
But the sustained price reduction into 2016 was largely influenced by the shift in OPEC policy. Confronted with deciding between either allowing prices to drop or ceding market share by cutting production in an effort to send prices upward again, Saudi Arabia the swing producer of OPEC kept its production stable, deciding that low oil prices offered more of a long-term benefit than giving up market share.
In the late August 2017, crude price fell to its lowest in over a month with nearly 3 percent reduction, after Hurricane Harvey ripped through the heart of U.S. oil industry and caused moderate and temporary reductions to U.S. Gulf Coast onshore and offshore production as oil platforms in the path were evacuated and onshore activities came to a halt. Refined fuel prices also spiked as the category 4 storm took down some 13 percent of U.S. refining capacity.
Recent Case
Since the beginning of the year, the price of Brent crude have fallen by close to 69 percent, a significant fall, largely attributed to the spread of the Coronavirus, emanating from China and spreading to other parts of the world. The slowdown in economic activity across the globe following the imposition of travel restrictions, flight cancellations, as well as the closure of shops and production outlets around the world, have induced a low demand for oil and fuels; sending Brent crude to US$52.18 by close of February 20 trading, from the year’s opening price of US$66.25 per barrel.
The situation was escalated when OPEC+ members failed to reach an agreement on production cuts in early March 2020, resulting in a price war between Russia and Saudi Arabia. Saudi Arabia after the flopped meeting retaliated against Russia by announcing a huge discount on their crude price and promising to flood the oil market with cheap oil.
As a result, by close of the trading session on Friday, March 06, global benchmark Brent had recorded over 31 percentage drop from the beginning of the year, to sell at US$45.27 per barrel. And at the opening of trading on Monday, March 09, Brent again tumbled by more than 30 percent; the largest one-day drop recorded since the start of the Gulf War in 1991.
The drop in demand coupled with the excess supply of oil on the market have seen tankers stranded on the ocean for lack of storage space, and refineries are unwilling to take crude and turn into Gasoline and Gasoil et cetera for lack of demand.
On Monday, April 20 the price of WTI crude fell by more than US$50 a barrel to close the day’s trading at negative US$30 per barrel despite a new OPEC+ deal to cutback oil production by at least 10 percent. On the day, traders with long position scrambled to exit with the fears that it would be difficult to find space to store the physical oil after the expiration of the April Futures contract. On the day, Brent crude also fell by close to 8 percent, to trade at roughly US$19.00 per barrel.
Written by Nana Amoasi VII, Institute for Energy Security (IES) ©2019
Email: [email protected]
The writer has over 23 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media and CNBC Africa
