The Fuse

Oil Market Forecasts Likely to Be Off-Target

by Matt Piotrowski | July 16, 2015

Forecasting oil markets has always been complicated and fraught with risk, and nowadays it’s no different with so much price volatility and so many moving parts. Last year at this time, when oil prices were still hanging above the $100 level, virtually none in the analyst community were predicting the market to be in the $50s in the middle of 2015, even among the most bearish of forecasters. Throughout the years, particularly since the surprising price rally of 2004, many forecasts have proven completely outdated mere days or weeks after publication.

Last year at this time, when oil prices were still hanging above the $100 level, virtually none in the analyst community were predicting the market to be in the $50s in the middle of 2015, even among the most bearish of forecasters.

The list of current uncertainties to consider when looking forward includes but is not limited to:

  • Sustainability of U.S. shale
  • The macro backdrop with dim situations in Greece and China
  • Expected ramp-up in exports from Iran
  • Ongoing outages in Libya
  • Rising production in Iraq
  • Saudi Arabia’s willingness to keep output high even at current prices
  • How consumers, particularly those in the US, respond to an extended period of lower prices

There are also the possible black swan events—or truly unforeseen events with sweeping implications—that could throw projections way off course in either direction.

Major forecasters such as the U.S. Energy Information Administration (EIA), the International Energy Agency (IEA) and OPEC have just released their projections through 2016, and if history is any guide, they are likely to be off-target once again. Last year, for example, not one of the three anticipated last year’s oil price collapse. Additionally, all three are inherently conservative in their forecasts, with each having their own biases: The IEA backs the major oil consuming countries, OPEC looks out for producers, and the EIA—a government agency—tends to reflect current trends to avoid giving ammunition to any one side.

Non-OPEC supply

Perhaps the biggest known wild card for the rest of this year and next is how non-OPEC supply, particularly U.S. shale, performs in a lower-price environment. The number of rigs in the U.S. has plunged over the past year, but has held steady and even rebounded as of late, clearly indicating that the current price level has dented growth but hasn’t caused an all-out collapse. However, although the rig count has collapsed, production has plateaued rather than fallen.

Last year at this time, the trio missed on U.S. output growth for 2015 while also overestimating where the market would be, failing to foresee the price collapse.

On average, the three say they see non-OPEC supply either barely rising or staying flat in 2016.

forecasttableThe IEA is projecting non-OPEC supply to hold steady, after 1 mbd of growth this year. In July of last year, the IEA saw non-OPEC supply growing a little faster for 2015, projecting an increase of 1.2 mbd. Total US supply—which includes condensates, NGLs and non-conventionals on top of crude—was then expected to rise by 0.7 mbd for 2015, but the IEA underestimated the potential even without foreseeing the price decline. It now estimates growth at 0.85 mbd in the US for 2015, but the effect of the oil price should be felt even more next year, if the IEA’s forecast comes to fruition—for instance, it sees U.S. “light, tight” oil—or shale—rising by a mere .06 mbd in 2016, versus 0.76 mbd this year.

The EIA is forecasting total non-OPEC supply growth at just 0.18 mbd for 2016, down from a massive increase of 1.45 mbd this year. The EIA vastly underestimated non-OPEC supply in its outlook released a year ago when forecasting for 2015, estimating growth of 0.97 mbd for this year.

OPEC’s outlook for oil supply growth outside the cartel is the most bullish of the three, estimating an increase of 0.3 mbd next year, versus growth of 0.86 mbd for this year. The big difference between the EIA and OPEC is largely the result of the US agency being more positive on US, Latin American and Chinese supply. In July of last year, the producer group saw non-OPEC supply rising by 1.31 mbd for 2015, a reflection of how heavy the group’s downward adjustments have been in light of lower oil prices and other factors.

With non-OPEC supply growth indeed taking a hit, the “call” on OPEC—or the number of barrels needed from the producer group to balance the market—will grow. The IEA estimates, for instance, the call will be 30.3 mbd in 2016, up a substantial 1 mbd year-on-year. Here’s the rub, though—that level is still well below current output of 31.7 mbd. Given that the group is showing no signs of putting on the brakes as all members compete for market share and extra Iranian volumes will likely hit the market later this year or early next, the global oil market appears to be headed for another year of a large, perhaps massive, surplus even as non-OPEC supply growth stalls.

Given that OPEC is showing no signs of putting on the brakes as all members compete for market share and Iranian volumes will likely rise later this year or early next, the global oil market appears to be headed for another year of a large, perhaps massive, surplus even as non-OPEC supply growth stalls.

Price matters

Of the three main forecasters, the EIA is the only one that offers price projections. The EIA sees WTI at $62 and Brent at $67 for 2016, not too different from recent trends with the market trading in the $50-$60 neighborhood.

The agency has been off in the past with its forecasts. Last year, for example, in its July Short-Term Energy Outlook, the government agency’s forecast for 2015 said US West Texas Intermediate (WTI) would average $95 and European benchmark Brent $105, but it has rapidly revised those estimates downward, as the massive surplus caused by growing U.S. shale output and OPEC’s decision in November not to cut production punctured prices.

wti prices

Source: EIA Short-Term Energy Outlook

The EIA now sees WTI averaging $55 this year $60 for Brent. It may have to, in fact, lower those projections if the market has another leg downward amid resilient U.S. shale output, economic jitters and higher supply from OPEC. The IEA cautioned in its latest report that, “The bottom of the market may still be ahead.”

Goldman Sachs, which tends to be bolder it its forecasts and will be always be remembered for its infamous “super spike” prediction to $105 in 2005, does not quite see the status quo. In the investment bank’s latest report, it says prices will fall further, but not collapsing. It pegs WTI at $50 for the current quarter, $49 for the second half of this year, with a rebound to $57 for the first half of 2016, not too far below the EIA’s forecast for WTI. Goldman has its Brent estimate at about $5 higher. A general consensus is emerging that prices will hang around the $60 neighborhood for the next 18 months, but as mentioned before, the conventional wisdom can at times be way off.

Although the EIA and Goldman forecasts are relatively close, the bank’s slightly more bearish outlook could be critical to US producers given how sensitive the shale oil patch is to price. The EIA’s forecast would bring about a better outlook for U.S. shale producers, but not likely by much—the government agency still sees a drop of 0.15 mbd year-on-year in 2016 for US crude supply at its projected price level, reflecting both the struggle and resiliency of US shale in the current environment.

The stability that forecasters see is not unheard of in the oil markets—for instance, from early 2011 through the middle of 2014, Brent mostly remained in a tight range of $100-$115.

The stability that forecasters see is not unheard of in the oil markets—for instance, from early 2011 through the middle of 2014, Brent mostly remained in a tight range of $100-$115. The oil market, however, has been anything but stable over the past year, which is still not enough to push forecasters far out of their comfort zones.