The Strategist

Experts: Oil markets are bad at forecasting

04/13/2018 - 11:15

Leading experts and oil market analysts very rarely give accurate forecasts, concluded economists of the Economic Expert Group in a new study.

Stephen Craven
Stephen Craven
Officials, companies, organizations and analysts give completely different forecasts for oil prices. And almost none of them guess the cost of raw materials, which makes many market participants have a stable belief that oil quotes have a completely random wander. Therefore, experts concluded that only the current price can really help in forecasting oil prices, and additional information does not increase the accuracy of "prediction" in any way. 

On average, inaccuracy of forecasts increases depending on the horizon of expectations of the expert community. Thus, the error in the long-term forecast is on the average about 50-60%, and the accuracy of forecasts in each analytical organization runs up to 20 percentage points.

Differences in the accuracy of forecasts within the time frame also differ markedly. Thus, OPEC forecasts are most accurate in the perspective of four years, the Energy Information Administration - 6-8 years, the IEA - 7-8 years, the World Bank - 11-12 years. This can be explained by the approach to oil prognoses. Expectations of analyst usually include an analysis of monotonous long-term dynamics, but in reality, the dynamics of oil prices fluctuations in recent decades has been associated with investments in the oil sector, and it is tied to economic cycles.

Forecasts of the US Energy Information Administration and the World Bank are the most accurate: at the biennial horizon, the accuracy of the forecasts of these organizations was approximately 63% and 65% respectively.

On the other hand, OPEC and IEA are the worst in this respect. Accuracy of the forecast of these organizations on a two-year horizon was 53% and 56% respectively.

The March report of the IEA states that the oil market in the second quarter of 2018 may face a deficit on the background of increasing global demand, maintaining current levels in OPEC and reducing production in Venezuela. At the same time, the forecast for oil demand (due to improved expectations for OECD countries) this year was raised to 99.3 million barrels per day from 97.8 million in 2017.

So far, production in Venezuela has been showing a trend towards an accelerated fall and in February fell by another 60 thousand,

OPEC, in contrast, predicts that in 2018, the increase in supply (by 1.66 million barrels per day) will outstrip the growth in demand (1.62 million barrels per day). As a result, some excess can be formed in the market.