Price Forecast: Do You Believe OPEC or Me? #petroleum #oilprices

By 23rd December 2015 Industry News No Comments

OPEC has published their 2015 version of their annual petroleum outlook,”2015 World Oil Outlook”. They have done their usual comprehensive job of working up the numbers and doing their balances. The major fly in their ointment is the questionable foundation that they selected for the outlook — their own price forecast. Here they apply their usual price forecasting technique of taking today’s price (as of the date of preparation) and projecting it, with growth, grow going forward. The questionable result of this technique undermines the entire outlook. That is a real shame since so much work has gone into the preparation and, if it were soundly based, the result would provide valuable planning guidance for the industry. But it is what it is!

There is one glaring omission in this report, which is repeated each year. Of all the breakdowns and assessments that OPEC presents, they DO NOT give a country-by-country breakdown of their expected member country crude production. For the world’s eminent petroleum organization to either purposely or fearfully withhold their project of each country’s contribution to world supply is indefensible.

As I often repeat, strategic planning BEGINS with a valid price forecast. Thus it is imperative that we examine the forecast that OPEC used as the basis for their long range outlook. In order to provide the proper background for evaluating their price forecast, I am showing a graph that includes 1) sixty years of history, 2) their previous forecast last year, 3 this years version of their forecast and 4) the Edwards Energy forecast, both last year and this year.

You will immediately notice the dramatic downward revision of the OPEC 2015 forecast versus the 2014 version. Since they missed the previous forecast of the year 2015 by $50/B (they were 100% too high), they were forced to revise the early part of the curve, and it appears that this revision seemed to suggest lowering the later years. Prudent, I would say! They did not apply the $50 correction to the later years, however, they reduced the price by only about a third of that. The result gets them, eventually, to the $90 level.

The Edwards Energy forecast is not nearly as dramatic. But what it loses in pizazz and encouragement it makes up for in accuracy. There is only a singe line for the EEC forecast because the forecast of a year ago still applies. The bad news is that, for the forecast to have been accurate, it required a rather pessimistic outlook. Unfortunately for the producer, but good news for the consumer, is the fact that the fundamental factors which produced the recent pricing action still apply. Therefore more pessimism continues to be displayed in the future years.

Now comes the critical question. Whom do you believe? On whose assessment are you willing to risk your financial future? Possibly my forecast was a “lucky guess”. Possibly OPEC’s forecast was a “hope springs eternal” stab at the future. This decision may be a difficult choice for you, but I will remind the readers that the success of your strategy and investment programs depend, in large measure, on making the wise choice.