“Adjusting to the price rout, analysts have been shifting their price outlooks downward, with Barclays, Macquarie, Bank of America Merrill Lynch, Standard Chartered and Societe Generale all cutting their 2016 oil forecasts this week.”
What help is this for all those people who had relied on the consensus view till now?:
- They were told, month after month, that prices could never fall below $100/bbl
- Then they were told that prices would soon rebound to $100/bbl
- More recently, they were told that prices would rebound, but it would take a little longer, maybe till 2017
But now they are being told, with no word of explanation or apology, that prices are actually going to go below $30/bbl.
I have been on the other side of this debate all along. As I wrote a couple of years ago:
“The blog seems to be a lonely voice, focused on what is really happening in the real world”
The problem is that many analysts believe that independent judgements could be very dangerous for their job security. They feel it is much safer to wait until the market moves in a new direction, and then all rush to issue new forecasts – as happened yesterday. This has been the pattern since the Great Unwinding began, as I noted exactly a year ago:
“Suddenly, far too late, the world is catching up with reality. Goldman Sachs and others yesterday halved their forecast for Brent oil to $42/bbl from $80/bbl. But this isn’t forecasting, this is simply catching up with events long after they happened. Brent, after all, opened at $45/bbl this morning.”
Yet all the time, the fundamentals of supply and demand were telling us that an energy supply glut was developing – as I highlighted in the December 2014 Great Unwinding research note on the oil market:
“Astonishingly, most commentators remain in a state of denial about the enormity of the price fall underway. Some, failing to understand the powerful forces now unleashed, even believe prices may quickly recover. Our view is that oil prices are likely to continue falling to $50/bbl and probably lower in H1 2015, in the absence of OPEC cutbacks or other supply disruption. Critically, China’s slowdown under President Xi’s New Normal economic policy means its demand growth will be a fraction of that seen in the past.
“This will create a demand shock equivalent to the supply shock seen in 1973 during the Arab oil boycott. Then the strength of BabyBoomer demand, at a time of weak supply growth, led to a dramatic increase in inflation. By contrast, today’s ageing Boomers mean that demand is weakening at a time when the world faces an energy supply glut. This will effectively reverse the 1973 position and lead to the arrival of a deflationary mindset.”
The chart of oil prices since 1900 tells the story.:
- Prices have historically always been below $30/bbl
- The only exceptions were due to the Iranian Revolution, and the central bank stimulus programmes
- Now they are reverting back to this level, as the Great Unwinding of stimulus continues
It is going to be a very difficult 2016. But hopefully our new Study – How to survive and prosper in today’s chaotic petrochemical markets: 5 Critical Questions every company and investor needs to answer – will help to support companies and investors as they start to deal with the consequences of the oil price collapse.