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Page added on February 10, 2015
Michael Lynch: Forecasts Of Oil Price Bottom And Recovery
For oil price forecasters, it is all but mandatory to start with self-deprecating humor, because the track record is so bad. Late 2013, surveys showed predictions for 2014 of $104 per barrel for Brent. Citi’s forecast of a significant drop raised eyebrows, in fact. Now, one reporter noted that expert forecasts range from $30-200, which is both true and funny, but doesn’t capture the actual expectations, primarily because of the time differential.
But once prices were clearly falling, there was a rush to be the most bearish. (I suggested back in December that a floor seemed to have been reached at about $50, although at other points on the way down I believed OPEC would manage to stabilize prices at those levels.) A few have suggested that a price of $20 per barrel might be reached, albeit only briefly, while others have picked a range of $40-50, although mostly after those levels had been reached.
The uncertainty about oil prices should not be surprising. Although most think of the political disruptions to the market and somewhat unpredictable role of OPEC as causing volatility, even basic elements like supply and demand under different pricing environments are highly uncertain, despite four decades of economic research. The notion of building a scientific, objective model to forecast oil prices is essentially the Philosopher’s Stone, an often sought-after cure-all but not actually feasible.
That said, oil markets do yield to good analysis, as does oil price forecasting. Although most people simply see the occasional proclamation of what the price will, or should, be, few pay long term attention to trends and methods in forecasting. In 1992, I published a long research paper at MIT on “The Failure of Long-Term Oil Market Forecasting,” which pointed out that the major forecasters were always predicting gradual growth in prices. As actual prices moved, they changed the starting price in their forecast, but kept predicting near-identical rates of change in the long-term future. A different pattern can be seen in recent price expectations.
Now, there is a divergence between those who think the price will recover to $100 in the near future (12-18 months) and possibly go much higher, and those who expect a period of a few years at roughly current levels. OPEC’s al Badri and ENI head Claudio Descalzi have both suggested low prices could lead to a new crunch and $200, while many more have argued that $80-90 is a likely range by year end (Harold Hamm of Continental Resources, and John Hofmeister, formerly of Shell), while perennial TV presence T. Boone Pickens says $90-100 in 12-18 months.
Contrast this with those who think $100 is not likely to be reached soon, including David Fyfe of Gunvor Group, Barry Aling of Gaffney Cline, and Prince Alaweed bin Talal, BP being more specific in predicting no recovery for 3 years. Citicorp and Goldman Sachs see no major price change soon.
Which gets to the core of the matter: people who are bullish on long-term oil prices tend to be consistently bullish, even when prices are high and they tend to be neo-Malthusians, that is, believing that the underlying cause of high prices is scarcity, not cyclical factors. Thus, T. Boone Pickens, who insisted oil supply couldn’t go above 85 mb/d, and was a champion of peak oil, supposedly lost big in 2008 when oil prices spiked, but then dropped. The famed peak oil advocate, Matt Simmons, tossed out many predictions that seem wildly unrealistic, including suggesting in early 2008 that oil prices would hit $378 because $100 a barrel was “preposterously cheap”.
(Contrast that with those like Lehman Brothers and myself who argued that the prices reached in 2008 represented a bubble due to momentum trading, which would not last.)
And, just as the 1980s oil price forecasts were influenced by bad theory, so the oil price bulls tend to believe in resource scarcity and one-way cost trends. Pickens is particularly known for promoting the “peak oil” fallacy, but many others, such as the late de Margerie, think the recent high cost levels are immutable. From 1985 to 1987, the cost of drilling a well in the US dropped by 25%, and there is no reason to think that something similar won’t happen now.
Aside from questions about Libyan oil supply, a nuclear enrichment agreement with Iran, and the possibility of Venezuelan unrest disrupting oil exports, the long-term sustainable price remains highly uncertain, primarily due to questions about the shale oil supply curve (which are hotly debated). However, it remains my belief that a long-term price is more likely to be $50-60 a barrel, rather than the above-$100 that many forecasters expect by 2020.
12 Comments on "Michael Lynch: Forecasts Of Oil Price Bottom And Recovery"
rockman on Tue, 10th Feb 2015 6:37 am
“From 1985 to 1987, the cost of drilling a well in the US dropped by 25%, and there is no reason to think that something similar won’t happen now.” The problem Forbes putting out such spin is that there are some of farts out here that were drilling wells in 1985-87. The Rockman drilled 25 NG wells during that period. First, forget that 25% figure. Rockman was drilling and completing wells for $50k – $60k that would cost $450k today. And the reason those costs were so low: almost no one was drilling. In fact, for the previous 6 decades ExxonMobil had at least one rig drilling in S Texas. But not then: the Rockman was drilling at a time when ExxonMobil didn’t have one rig turning to the right in that region.
And the reason: the Rockman began applying a seismic exploration technique which, though common offshore for 10 years, had not been utilized in the area he focused on. IOW the Rockman’s drilling was an anomaly. Forbes prediction will be correct: the cost of drilling will decrease. Doesn’t take much guts to make that call since drilling costs have been slipping down for a couple of months. How far they fall remains to be seen. But the lower drilling costs are not a sign of a drilling increase: it’s a direct manifestation of decreased drilling activity. And fewer wells drilled obviously means less new production. Not a very difficult dynamic to grasp IMHO.
westexas on Tue, 10th Feb 2015 7:44 am
Odd that Michael Lynch did not address some of his own errnoeous own oil price predictions. Following is an excerpt from an OpEd that Lynch wrote in August, 2009, where he predicted that oil prices would soon be back down to close to $30. Note that Brent averaged $80 in 2010 and $110 for 2011 to 2013 inclusive–for a four year average price in excess of $100 for 2010 to 2013 inclusive.
Based on Lynch’s track record and based on his revised forecast for a $50 to $60 price (about twice his previous prediction), I suppose that we should expect an average Brent price of about $150 to $180 for 2016 to 2019 inclusive.
Peak Oil’ Is a Waste of Energy
By MICHAEL LYNCH
Published: August 24, 2009
“Oil remains abundant, and the price will likely come down closer to the historical level of $30 a barrel as new supplies come forward in the deep waters off West Africa and Latin America, in East Africa, and perhaps in the Bakken oil shale fields of Montana and North Dakota. But that may not keep the Chicken Littles from convincing policymakers in Washington and elsewhere that oil, being finite, must increase in price.”
Link: http://www.nytimes.com/2009/08/25/opinion/25lynch.html?pagewanted=1&_r=3&emc=eta1
Plantagenet on Tue, 10th Feb 2015 8:15 am
Go back to 1989 and you’ll see lynch was right— oil did fall from $140 down to $30 bbl that year
So far he is right about this year too. The oil glut is continuing and prices are settling at ca $50 bbl
westexas on Tue, 10th Feb 2015 8:55 am
Plant,
I assume you meant to say 2008?
In any case, the annual price of Brent fell from $97 in 2008 to $62 in 2009. The monthly low was $40, in December, 2008. When Lynch wrote his OpEd, in August, 2009, the monthly Brent price was $73.
So, in 2009 we had seen a sharp price decline, but the price had rebounded, and Lynch was predicting a renewed decline–back to to “closer to $30.” As noted above, Brent averaged $80 in 2010 and $110 for 2011 to 2013 inclusive.
Note that Brent averaged $99 in 2014. So, the average five year Brent price (2010 to 2014 inclusive), after his call for $30 oil, was $102.
I have a pretty hard time seeing what Lynch got right about the five subsequent years, after his call for $30 oil.
Speculawyer on Tue, 10th Feb 2015 2:34 pm
Lynch is a permabear on oil prices. Occasionally he is correct . . . just like a broken clock is occasionally correct.
Bob Owens on Tue, 10th Feb 2015 3:17 pm
Predicting the price of oil is a fool’s errand and always will be. There are simply too many variables. At the moment it looks like demand has dropped below supply and will keep costs low. The world economy is slowing and the low demand should continue below supply for quite a while. That is the most accurate prediction I am willing to make and that could totally change with 1 truck bomb in Saudi Arabia. Buy a fuel efficient car, drive less, and stop worrying about oil.
Newfie on Tue, 10th Feb 2015 4:08 pm
I stopped reading as soon as I saw Michael Lynch.
shallowsand on Tue, 10th Feb 2015 5:56 pm
I get tired of those that are consistently bearish or bullish. Lynch rips on T B for being consistently bullish. Lynch is the pot calling the kettle black, I have never seen him anything but bearish. Spec is spot on.
My first investment in oil was 6 bbl day in 1997. Since then I have seen $17 to $8 to $32 to $14 to $140 to $26 to $111 to $72 to $103 to $38.
Anyone who is a perma bull or perma bear has not been paying attention.
However, what does seem true is the lows are getting higher. Oh how I would have loved $40 oil in 1998-early 1999. But then it cost about $12 to get it to the tank. I was happy with $40 in 2004.
Costs have skied since 1997. They may get hammered down some from 2014, but not enough to make sub $50 permanent, unless BAU is near its end.
westexas on Tue, 10th Feb 2015 7:33 pm
We have seen three year over year prices declines of 17% or more in annual Brent crude oil prices, since 1997:
1997 to 1998: $19 to $13 (-32%)
2000 to 2001; $29 to $24 (-17%)
2008 to 2009: $97 to $62 (-36%)
Note the pattern of higher lows for the sequential year over year price declines, $13, $24, $62.
Brent averaged $99 in 2014. We will see what happens in 2015.
nemteck on Tue, 10th Feb 2015 7:39 pm
Why reading this article with the stupid prediction when our own shortonoil has given us already a precise long-term forecast:
”We hate to inform these analysts but the price of oil is falling toward $0.00/barrel. That will occur sometime in the 2030-2035 time frame. This is happening because the world’s petroleum supply is depleting, and we are now using the last 25% of the total reserve that is worth extracting.
shortonoil on Sun, 26th Oct 2014 8:10 am
I hope to live this long to have the pleasure to fill up my car and pay nothing. Maybe the gas station throws in a free car wash as a thank you.
Davy on Tue, 10th Feb 2015 7:50 pm
Nem, you got me thinking…..cars someday will make a great garden hot house for early spring planting.
Revi on Wed, 11th Feb 2015 7:25 am
It seems like a “glut” now, but maybe not for long.