Crude prices have become increasingly harder to predict, particularly in the medium- to long-term. Analysts have made a series of miscalculations about supply and demand, which has left some traders wondering if new models will be needed to chart the waters. Especially as geopolitical tensions appear to be far from winding down.
It’s not just a matter of the two largest agencies that track oil production being in disagreement. The IEA predicts significantly less demand this year than OPEC. But the factors being focused on appear to have led price analysis in the wrong direction. Geopolitics is notoriously unreliable, but provides short-term shocks that often are adjusted to. But there are other fundamental issues.
The Recession that Never Was
For example, last year economists and analysts predicted that the world’s largest oil consumer would fall into a recession. This led to considerable speculation that crude demand, and crude prices, would slide. But the long-expected recession didn’t happen last year, and oil consumption remained robust. Analysts also suggested that slow economic performance from the world’s largest importer, China, would mean less demand.
But, overall, demand remained solid. And with the global economy expected to go through a bounce period, some analysts are questioning whether that is the right metric to consider for price forecasts. Last year’s overreliance on economic models to predict demand failed to take into account factors such as China building inventories due to lower crude prices, or OPEC’s willingness to curtail production in order to keep up prices.
So, Does That Mean Higher Prices
It’s not just demand that’s being miss-forecasted. The EIA month after month predicted that US shale production would decline, but was repeatedly shown to be wrong as US production actually increased. The US ended the year as the world’s largest crude producer, contrary to forecasts that the energy transition would see a move away from fossil fuels. Now, demand for EVs have stalled as some tax incentives roll off, and customers are facing the pinch of high inflation and looking at bargain cars.
The weather has also had a role to play, as unexpectedly cold conditions across the US not only increased demand, but reduced production and exploration. A major outage at a US refinery reduced the amount of distillates coming to market, and raised retail prices. The average gasoline price in the US has gone back above $3.50/gal for the first time since last year. That’s even before the summer driving season starts.
The Inevitable Squeeze
Last year’s predictions of slower demand contributed to a reduction in exploration, as evidenced by the decline in US rig count by December. That implies that there is less chance of new production to come on line as both the IEA and OPEC agree demand will increase (although by different amounts). If the global economy does improve, then the price of crude would likely follow.
That’s assuming there is no recession. If economists and analysts were wrong about there being a recession last year, it doesn’t mean they will be right about there not being one this year.
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- Source: https://www.orbex.com/blog/en/2024/03/can-crude-prices-keep-going-higher
