Forecasting folly: Why forecasts of a rebound in oil prices are prolonging pain

What incentive have US shale operators got to shut production, or the banks that are financing them to pull the plug? Okay, oil prices are hovering about $30 per barrel now, just above operating costs, but if many of the investment banks are to be believed prices are set to rise rise sharply during 2016. Are optimistic forecasts just serving to prolong the period of droopy prices?

The start of the year has seen investment banks tearing up previous forecasts by ~$20 per barrel as the price of oil has sunk during January. But what all (bar one) forecast is a recovery during 2016 and into 2017.

read more

Watch for flat crude futures curve to signal end of oil bear market

A flattening in in the crude futures curve will be the sign that the decline in crude prices has run its course. That’s according to recent research published from both Goldman Sachs and PIMCO.

But what does that mean? Well, the best indicator of supply and demand is often not the actual spot price but the difference in price between adjacent futures contracts (known as the spread).

Periods of excess supply are normally characterized in futures prices by a “contango” structure. In contango, contracts for deferred delivery trade at a premium to the spot price to compensate the seller for the costs of financing, storing and insuring the product before delivery. And so a narrowing of spreads for both Brent and West Texas Intermediate (WTI) indicate a closer balance between supply and demand.

read more

What is the significance of January 13th 2015 to the oil market?

As Brent crude prices approach $30 per barrel (incidentally WTI dropped just below into the 20’s overnight) traders, buyers, producers and commentators are asking where the bottom of the barrel is. To think about how and why crude might bottom its worth looking back 12 months to the 13th January 2015 as that was when oil prices fell below $47 per barrel after falling precipitously from over $115 per barrel just 7 months before. Oil prices then rebounded to over $65 per barrel by mid-May.

As investors, traders, buyers and sellers try to anticipate when the bottom will occur lets look back at where we were 12 months ago. What was the spark that caused oil prices to rebound? Although its always difficult to ascribe reason to volatile price movements there are some clues. Back in early 2015, signs of production cuts (specifically a decline in the rig count) from US shale producers and a more relaxed outlook to growth in China resulted in the oil price rising by almost 40% in the space of a few months.

read more