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Thursday, December 19, 2019

The Best And Worst Oil Predictions Of 2019

There’s nothing like wild volatility to destroy the integrity of those high-end bankers and analysts who are brave enough to make oil price predictions year in and year out.
But the forecasting nightmare doesn’t stop them, even at the worst of times.  
In the final month of last year, banks and analysts were brave enough to divulge their predictions for 2019. 
At that time, the second year of the OPEC agreement was coming to a close; the U.S. had re-imposed sanctions on Iran four months earlier with waiver extensions; and the average price of a Brent barrel for December was changing hands at $56.50, compared to the month earlier average of $65.20. WTI averaged $49 in December 2018. OPEC had agreed to cut production again for 2019.
So who should we look for when it’s time to forecast what oil prices will do in 2020? That depends on their track record the last time around. 
Here are some of the best and worst oil price predictions of 2019:

The World Bank 

For 2019, the World Bank was one of the first on the scene to provide its outlook in late 2018. 
The Bank said the most important factor for 2019 would be OPEC, specifically the lack of spare production capacity among OPEC members. This lack of oil production capacity would provide “limited buffers” should there be a sudden shortfall in the supply of oil “raising the likelihood of oil price spikes in 2019.” 
While WB acknowledged that the world was currently in a state of oversupply, it could swing the other way quickly. In the first month of 2019, the World Bank conservatively predicted that Brent would average $67 per barrel for the year—a $2 per barrel decrease from its June 2018 predictions for 2019. The WB was quick to add that the “uncertainty around this forecast is high.”
How did they do? Aside from needlessly worrying the market with OPEC's lack of capacity, it turns out their prediction was a bit high. The average price of the Brent barrel in Q1 2019 was $63.30; for Q2 it was $68.30, and Q3 at $61.90. November’s average was $62.70.

Citi 

Citi’s forecast for 2019, also made in December 2018, was more sober-minded, with the bank predicting that Brent would average $60 for the year. It, too, predicted a volatile market for the next year, largely because the U.S., Russia, and Saudi Arabia—the top three oil producers in the world--all had different views as to what that perfect oil price should be. The bank also predicted that oil production in the United States would continue to offset much of what OPEC would cut—a prediction that turned out to be close to reality: US production has increased 1.2 million bpd this year—precisely what OPEC agreed to cut.
How did they do? Not terrible. Its primary range was for Brent to trade between $55 and $65 per barrel--a generous $10 price range. Even with that big range, oil sat above $65 for the better part of February through May.  

Bank of America Merrill Lynch (BAML)

Also in mid-December 2018, BAML took a stab at making Brent price predictions, forecasting that oil would resume its path back up to $70 average in 2019, with a potential for higher prices in Q2. Similar to Citi and World Bank, BAML said that oil prices would be volatile.
How did they do? It’s hard to argue with the fact that oil indeed appears to be trending upward, which could be interpreted as “resuming its path back up to $70". And Q2 was in fact higher, with oil prices actually surpassing $70 for a time in April and May.
However, BAML lost a bit of credibility in our book when it hedged its forecast by saying that “the only certainty is uncertainty.” BAML hedged further in April when it said oil prices had a higher chance of hitting $100 than what the market consensus was, due to OPEC supply cuts, a slowdown in US shale, and IMO 2020 regulations.  
BAML further watered down its predictions in August when it said oil could fall to $30 or $40 should China decide to import substantial amounts of oil from Iran, despite the US sanctions.

The EIA

A month after Citi, WB, and BAML ponied up their predictions, the EIA came out with its own. Its prediction for 2019, provided in its January 2019 Short Term Energy Outlook, was that Brent would average $61 per barrel. Around this time, specifically at the start of the year, Brent was trading at $53.80 and WTI was trading at $45.41.
How did they do? Not half bad. Brent traded at an average of $61.90 for the 3rd quarter 2019, and November’s average was $62.70—less than $2 off per barrel for a prediction made 11 months ago in a volatile market.
That’s it for the predictions made at the start of the year. But other predictions along the way, armed with a half a year or more of actual data, are noteworthy as well.
FX Empire:  Using adaptive dynamic learning (ADL), FX Empire predicted in July of this year that oil prices would rotate between $47 and $64 between July and October, before falling in November and December to a range between $45 and $50. FX Empire said it could actually dip below $40 by the end of 2019, or in early 2020.
How did they do? FX Empire’s ADL appears to be pretty far off the mark. This CL=F is today trading at $59.42, nearly $20 higher than it’s sub-$40 prediction for the end of the year.
Goldman Sachs’ Jeff Currie: In October, Currie, head of Goldman’s commodity research, warned that oil prices could fall as low as $20 per barrel for WTI if oversupply were to result in full storage facilities. With nowhere to put it, explains Currie, the price of oil would fall dramatically as production would have to crash.  However, crude oil inventories in the United States are not dramatically up, and are almost even-steven with this time last year, down a total of 1.41 million barrels over the last 50 weeks. Global oil inventories are a different story, though. In Currie’s defense, he did say that there was a less than 50% chance of oil falling below $20 barrel.
How did they do? By our math, that 50% hedge would have made Goldman correct either way.
IEA: Piggybacking off Goldman’s October forecast for the oil-inventory-pocalypse, the IEA’s Fatih Birol said that these low prices would force the US to cut production, resulting in a price hike once again. In July, the IEA predicted that slowing oil demand would cap oil prices, and keep them from moving too much higher. At the time, Brent was trading at $63.01, with WTI trading at $56.18.
How did they do? With Brent trading on December 12 at $64.47, the $1.50 increase comfortably falls within the not-too-much-higher range, so we'd say the IEA's prediction was spot on.
Analyst Poll: In August, Reuters polled 51 economists and analysts, who thought Brent would average $65.02 in 2019. At the time, Brent had averaged $65.08, so the $65.02 wasn’t stepping out on a long limb.
How did they do? Wisely, the analysts cited the US-China trade dispute and risk of an economic slowdown as the reason for its new forecast, which was down from $67.47 for the month before. Still, the price prediction was a bit high.
RBC Capital Markets: RBC’s Helima Croft in May suggested that Brent could top $80 over the summer due to Iranian tensions.
How did they do? RBC got it partially right. Iran tensions did indeed escalate. Iran repeatedly made threats to close Hormuz, drone strikes attacked Saudi Aramco’s oil infrastructure, and Iran seized a British oil tanker and held onto it for months. Still, prices didn’t get anywhere near $80. But this isn’t your daddy’s oil market. A year or two ago, tensions in the Middle East—especially ones that are more than just threats, would have sent oil prices soaring. But the market is today permanently spooked with the trade war negotiations with China and slow oil demand growth, meaning these geopolitical risks no longer pack the same punch.
Iran: In June, a top military aide to Iran’s Supreme Leader issued a prediction which was really more of a warning: that the first bullet fired in the Persian Gulf would push oil prices above $100 per barrel. At the time, oil was trading at $61.67.
How did they do? Not well. Things did heat up in the Gulf, and bullets—many of them—have been fired over the last month after major fuel protests in Iran. There were also drone strikes over Saudi Arabia that did significant damage to oil infrastructure, which took offline over 5 million bpd. Still, oil got nowhere near $100. 
Eurasia Group: Henry Rome, a senior analyst at political risk consultancy Eurasia Group, agreed that these same Iranian tensions could push prices above $100, and a major confrontation with Iran “would likely” send prices above $150.  
How did they do? Even worse than Khamenei’s military aide.
WSJ Poll: At the end of April, a week or so after the US announced that it would not extend the waivers to buyers of sanctioned Iranian oil, WSJ-polled analysts expected Brent to average $70 per barrel in 2019—an increase of $2 per barrel from its previous poll a month earlier.
How did they do? Oil was already trading at $70 at the time of their prediction, so it wasn't really a huge leap of faith at the time. Still, prices failed to get any higher than that for the remainder of the year, rendering their prediction in the far-too-high category.

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