Title : How The Oil Rally Took Forecasters By Surprise -- WSJ -- May 6, 2018
link : How The Oil Rally Took Forecasters By Surprise -- WSJ -- May 6, 2018
How The Oil Rally Took Forecasters By Surprise -- WSJ -- May 6, 2018
"A sensitivity to geopolitics and the opaque workings of OPEC make it difficult to predict oil prices." -- WSJ. Well, that was profound.Link here.
Let's do the comments first. There are eight comments, suggesting this story is not a particularly compelling story for most WSJ readers. The general theme: analysts are clueless. This comment is probably the most accurate: "The reason oil prices are impossible to predict is that they aren't rational. Period. Our oil pricing mechanism -- the future's market -- does not reflect real supply and demand. It's a financial game"
The comment I liked best (the reader knows what he is talking about): "The number of "drilled but not completed" well inventory is good in the US but likely lags in other parts of the world. This puts the US in a strong position to ramp up completions and take advantage of surging prices. Fracking sand prices will continue to go up and local water supply will remain key issues that are solvable at a cost. The Oil Majors will be rocking and rolling in the profits. Dividends will go up!"
I'm not sure I agree that all the "oil majors" will do all that well.
Now, back to the linked article. The lede:
No one is more surprised by $75 oil prices than Wall Street’s oil experts.
The price of crude has climbed nearly 12% this year and has reached its highest levels since 2014—a rally that has caught most big banks flat-footed. Last December, analysts surveyed by The Wall Street Journal predicted that Brent crude, the international benchmark, would average around $57 a barrel in the first quarter. Instead, prices averaged $67. On Friday, Brent prices rose to $74.87 a barrel.
Analysts often get it wrong across financial markets. Last year, they wildly underestimated gains on the S&P 500. Gold hasn’t followed the script of the almost yearly predictions for higher prices. And U.S. bond yields have persistently undershot the estimates of many large firms for years.Then:
But oil is seen as particularly tricky given its sensitivity to hard-to-gauge geopolitics and the opaque workings of the Organization of Petroleum Exporting Countries.
Recent years have been particularly challenging. The rise of the U.S. shale industry confounded all expectations, OPEC has shocked the market with its policy decisions, and the rapid collapse of Venezuela and other geopolitical shifts have jolted prices higher faster than many expected.
“Predicting oil prices is a mug’s game,” said Craig Pirrong, a professor of finance at the University of Houston. “The inelasticity of supply and demand mean that the price is very sensitive to random shocks that are themselves hard to predict.”I agree completely, and I've said it many, many times on the blog: predicting oil prices is a fool's errand.
To me, the fundamentals or the technical aspects or the supply/demand story don't justify current prices. I simply do not understand it. When oil goes above a certain level, probably about $100 or so, folks suggest "conspiracy theories" and opine that speculators are behind the price rise. And yet, when crude oil drops below $40, we don't hear those arguments.
The WSJ article had a great headline, but it didn't say much. It certainly did not add anything to my understanding of the oil sector.
Thus Article How The Oil Rally Took Forecasters By Surprise -- WSJ -- May 6, 2018
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