3 Forecasts On Oil And One Accurate Prediction

|
Includes: OIL, USO, WTI
by: Orbex

Summary

The Doha failed oil negotiations clearly was the big market-moving event this week.

Gary Shilling believes that the current oil wars are not about the price to balance budgets or total cost of production, but rather the marginal cost.

Michele Della Vigna, co-head of European Equity Research at Goldman Sachs, said that "we can see it as the rational decision that there has been no decision."

By John Benjamin

Crude Oil

Source: Stock photo.

Covering the boldest of bullish and bearish forecasts on oil so far, only one company's forecasts have been right on target.

The Doha failed oil negotiations clearly was the big market-moving event this week. In what would have otherwise been a slow start to the week, with economic data staying largely quiet, Sunday's Doha talks set into motion various markets. Oil futures, both Brent and WTI, gapped lower and the yen surged while gold's moves were limited.

Crude oil, which turned bullish just a week ago, is now on shaky grounds as to what will happen next. The uncertainty in the oil markets has also seen widely divided opinions among analysts and investors as well. Here are the top three forecasts on oil, ranging from the boldest of predictions to the most conservative.

The Very Bearish View: Oil at $10

BusinessInsider reports that Gary Shilling has upped his (bold) forecasts for oil prices to fall to $10 a barrel. Shilling is a financial analyst and twice ranked as Wall Street's top economist and voted the No. 1 commodity trader advisor by Futures Magazine in the U.S., according to his biography. Shilling's bold call for $10/barrel of oil was first published in December 2014 on BloombergView. Brent was trading at $61.38, while WTI crude oil settled at $56.52 at that time.

According to Shilling and his famous chart ("This graph must drive the Saudis up the wall"), he argues that OPEC production was essentially flat for a decade, which led to the U.S. frackers eating into its market share. Shilling believes that the current oil wars are not about the price to balance budgets or total cost of production, but rather the marginal cost. According to him that is $10-$20 a barrel in the Persian Gulf.

When did WTI last trade at $10? Never. WTI Crude oil has traded close to $10, but only got posted a low at $9.75 in April 1986.

Click to enlarge

The Conservative View: $35-$45

CNBC.com reports that according to some portfolio and fund managers, the recent no-deal in Doha was, in fact, a better deal in the long run, citing that rebalancing process of supply and demand would reach its natural conclusion. Michele Della Vigna, co-head of European Equity Research at Goldman Sachs, said that "we can see it as the rational decision that there has been no decision." According to Della Vigna, it has taken 18 months for the markets to rebalance amid falling non-OPEC production, while demand is showing signs of recovery. He believes that had OPEC members reached an agreement in Doha; it would have brought oil prices back above $40, and that would incentivize producers to ramp up production again.

Echoing Della Vigna's views are other firms that are making bullish calls on exploration and production companies, as many of these hedge fund firms expect that the lower oil prices have led the companies to balance their budgets and be leaner. And it's noted that this is the reason why the E&P sector is up 9.0% on a YTD basis. Joining Goldman Sachs forecasts, many analysts expect crude oil to trade near the mid-$30s to $40s in the near future.

What was the lowest price oil -- WTI -- has seen since its declines from $100 a barrel in 2014? Oil prices posted a low of $26.21 on Feb. 11. Oil traded at these levels between 2002 and 2004.

Click to enlarge

The Very Bullish View: $60-$80

Andy Hall, nicknamed the "God of Oil Trading," who runs a $2 billion energy and commodities hedge fund, Astenbeck Capital, has been the most bullish of all. Despite his fund falling 4% in January following losses of over 36% a year before, Hall expects oil prices to trade near $60-$80 as he expects the oversupply and the imbalances to turn into a deficit. He expects the rapid reductions in inventories to lead eventually to higher prices.

Oil prices were trading near the $60 handle between May and July 2015, after initially falling to lows of $40-$42.

Click to enlarge

The Most Accurate/Nearest Prediction on Oil So Far

The winner is undoubtedly Citigroup, which called it "trade of the year" back in January 2016. Citigroup's forecast on oil was supported by UBS Group AG to Societe General SA. According to this article on Bloomberg, Citigroup noted that while Iran's supply might flood the oil markets even further, they expect production to stay flat. In January, Citigroup said that oil would hit a bottom within one to three months (oil hit a bottom near $26 just under a month later), and expects Brent oil to average near $41 in the third quarter of 2016 and to $52 in the final three months.

Brent oil was trading at $32.18 on Jan. 22; Brent later fell to $30 lows and is now trading at $42.80.

Click to enlarge

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.