Ivan Fallon: Oil price will defy expectations set out by analysts

Oil analysts love this type of situation, when they can dazzle clients and bosses with an array of statistics which can sway the market either way.

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The oil price entered 2014 at almost exactly US$100 per barrel. It entered 2017 at about half that. And in between – this time last year – it was just below $30 per barrel.

To these key numbers – $100, $50 and $30 – oil analysts are now adding another: $60. That is the consensus price for what oil will be a year from now, although even in the past week it has been so volatile that it could get there by the end of January. On January 3, for instance, Brent crude hit an 18-month high of $58 before falling back again.

Lee Cooperman, whose Omega Advisors manages funds of $3.4 billion, is forecasting the price to hit $60 to $70 per barrel by the year-end, the most bullish forecast I’ve seen. He is often right. But what are the bets that some time in the course of this year oil will drop back to $40?

Oil analysts love this type of situation, when they can dazzle clients and bosses with an array of statistics which can sway the market either way. They have never had so many conveniently to hand, starting with the announcement that Opec and non-Opec members have agreed to cut production by 1.6 million barrels per day (bpd) in 2017.

On the other hand, there is an awful lot of oil hanging about – Opec's own analysts estimate the overhang of unsold inventories to be the equivalent of 800,000 bpd, cancelling out half the production cuts. And remember those American frackers who were supposed to be wiped out by Saudi Arabia's policy of keeping the price low? Well, they haven't been. Admittedly, 110 Canadian and US companies did go under, reducing US oil production last year by 1 million bpd, but the majority are still fracking away. They have survived by doing what all companies do in adversity – cut their costs.

They are now making good money at $50 and JP Morgan’s oil analyst, Scott Darling, reckons that a $60 price will result in another 600,000 bpd of fracked oil coming on to the market. As one of the frackers remarked jocularly over the New Year: “At $40-50, we can have a fracking good time.”

There are many, many more components to forecasting the oil price, including growth in the world’s economies, which is expected to add 1.2 million bpd to demand this year (about the same as each of the past two years), and the impact of a higher dollar and interest rates.

Iran is still something of an unknown quantity and Nigeria, which didn’t sign up for the cuts, could double its production to 1.5 million bpd, and so could Libya.

Russia, the second-largest producer of gas and third-biggest oil producer, is another non-Opec member and what it does depends largely on Vladimir Putin’s view of the world on any particular day. He has nominally committed to the Opec cuts, but he also has some huge demands for cash to finance his military adventures and stimulate an economy that has halved in size in the past decade (on some measures it is now the 13th-largest economy in the world, half as big as Italy, although in reality it is a lot bigger than that).

It is scarcely surprising that oil analysts are no better at forecasting than economists, in deep disgrace after their post-Brexit prognostications. They have had a bad week after the Bank of England’s chief economist, Andy Haldane, unwisely opined that his profession’s failure to forecast the financial crisis was their “Michael Fish moment”, an allusion to the poor BBC weatherman’s famously inaccurate forecast ahead of the UK’s great storm of 1987.

But based on years of experience, we do know something. We know there will be surprises during the year – a war, a revolution, a coup, a huge accident or just plain cussedness by Mr Putin or the Iranians – to break the balance. President Trump is utterly unpredictable and could do anything. What we definitely know is that the oil price will not stay within the neat parameters set out by analysts – it never has and it is not going to start now.

Meanwhile deep in the desert, Saudi officials and an army of advisers are scrambling to prepare for the $2 trillion IPO of Saudi Aramco, now tentatively planned for next year. “This listing is different to any other in terms of scale, the nature of the offering, the uncertainties around it, the time line, the process,” an official was quoted as saying over the weekend.

We certainly know that.

Ivan Fallon is a former business editor of The Sunday Times.


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