The beauty of the oil industry lays on the fact that it is unpredictable. It has a striking way of surprising everyone. Even those who think they know it best, sometimes it makes them feel they know nothing about it. The current oil market downturn and the analysts’ oil prices forecasts are a clear example of such a fact.
For the past few weeks, many oil market analysts have been generous in flooding the media with their expectations that oil prices will dip below $30 per barrel. In fact many of them are pointing at numbers as low as $15 and $10 per barrel. These expectations raise important questions such as; how low oil prices can go? Will the oil market analysts be right after all? And where will oil prices be in 2016?
In order to answer the above questions, it is important to refresh our memories with few fact and figures which illustrate the performance of the oil market analysts in predicting oil prices during the past few years.
Comparison Between Real Oil Prices And Analysts’ Expectations, Source: Bloomberg
The above graph is a comparison between real oil prices and analysts’ expectations for the past few years. It clearly illustrates how the analysts’ expectations have not reflected reality.
Starting at the end of 2009 as shown in the graph, we can see how wrong and far from reality were the analysts’ predictions of oil prices. While they forecasted oil prices to be around $65 per barrel, the real oil prices at that time were at levels above $90 per barrel. That is a difference of more than $25 per barrel from what the analysts have predicted, a huge difference indeed.
A similar forecast happened during 2010 where analysts’ expectations were too optimistic. They forecasted oil prices to be at levels above $95 per barrel. Unfortunately, the real oil prices at the that period were at levels below $90 per barrel.
The worst analysts’ expectations were made during 2014. They predicted the year to start with oil prices declining below $90 per barrel and reaching to levels below $80 per barrel by May 2014. However, the exact opposite is what happened. At the beginning of 2014, oil prices were high and kept increasing throughout the first half of the year until it reached its highest level by May 2014 which was above $100 per barrel.
Even during the period after May 2014 when oil prices were experiencing a continuous decline marking the beginning of the current market downturn, the analysts’ expectations were quite wrong especially in the direction where oil prices were heading.
Regardless of the evidence at hand -represented by the glut in the oil market, they expected oil prices to raise again to $80 per barrel by August 2014, but it never happened and oil prices continued to experience a sharp decline. That means the analysts did not really expect oil prices to collapse as it did. They were a quite optimistic.
They did not expect the current market downturn. In fact none of them predicted oil prices to reach to $30 per barrel at that time. So why they are expecting oil prices to reach to levels less than $30 per barrel now? The answer is simple, it is due to the human emotions experienced during a market cycle.
Human emotions play a prominent role on how people react, analyze or make decisions during a market cycle. The figure below illustrates emotions experienced during a complete market cycle. It shows how people feel excited and thrilled when the market is growing, and how they also feel depressed and panic when the market is collapsing.
Human Emotions During A Complete Market Cycle
The oil market analysts are no exception. The emotional aspect of the market cycle plays an important role in their expectations. This means when the analysts try to predict the future of oil prices, their emotions which are associated with the market state influence their expectations.
For instance, when the oil market is growing and oil prices are high and sustained for a long time, the analysts’ expectations fall in a range close to such high oil prices. The euphoric sense of continuous growth and sustained high oil prices for long time influences their predictions, and makes it unrealistic to predict a sharp collapse in oil prices.
This is exactly what happened in the period prior to the beginning of the current market downturn in 2014. The analysts could not expect the current downturn regardless of the presence of few factors indicting such a downturn.
In a similar way, when the oil market is going through a tough time such as the current downturn, the predominant human emotions are; fear, depression and panic. Therefore, when the analysts try to predict the future oil prices -with such emotions in play, they will surely expect oil prices to collapse more and things to get worse, because this is the current state of the oil market; A Downturn. And this is exactly what the market analysts are doing right now by expecting more downs and predicting oil prices to dip to $10 per barrel.
As we are done explaining why the analysts’ expectations do not reflect the reality, it is time now to answer our previous questions: how low oil prices can go? Will the oil market analysts be right after all? And where will oil prices be in 2016? The answer for the first question is given by the current oil markets state. Oil prices’ resistance to go to levels below $30 per barrel tells us how low oil prices can go.
For the second question, based on the analysts’ past oil prices expectations and the current resistance of oil prices to go to levels below $30 per barrel, the answer is so clear. The oil industry will continue to teach us that we still know nothing about it. And the current analysts’ expectations may be another addition to their previous failures to accurately predict oil prices.
And if you want to know the answer for where oil prices will be in 2016, look at the direction of real oil prices with reference to analysts’ expectations throughout the past five years and you will surely find a specific pattern. You know what the analysts are expecting for 2016, therefore applying that pattern will give you an idea where oil prices heading in 2016.
