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Oil countries' forecasts are inaccurate – is this intentional?

Oil producing countries' price forecasts are becoming increasingly inaccurate. For 2015, their starting point was an average oil price per barrel of USD 95, while the actual average was USD 49. Their forecasts are important: Oil countries base their government budgets on them.

Notably, forecasts from the International Energy Agency (IEA), the New York Mercantile Exchange (NYMEX), and the U.S. Energy Information Administration (EIA), are becoming more accurate. Since 2010, the three major institutions have seen the smallest margins of error. This is the conclusion of the advisory firm Roland Berger in its study 2016 Oil price forecast: who predicts best? This study has been analyzing the price forecasts from the largest oil producing countries and institutions since 2007.

"The combination of more shale oil production in the United States and the stagnating demand for oil despite a growing global economy is leading to oversupply and therefore to extremely low oil prices," explains Arnoud van der Slot, partner at Roland Berger in Amsterdam. Considering their 2015 predictions, both the countries as well as the institutions were surprising. The institutions' forecast for last year was USD 73 per barrel WTI.

Nevertheless, Van der Slot believes that the countries are using the forecast as a political tool, deliberately aiming high. "If they predict a low oil price, they also have to cut their government budgets. That's not always an easy sell to their citizens. But now that the oil price has hit its lowest level in thirteen years, we're finally seeing budget cuts. And they're now easier to justify."

According to David Frans, principal at Roland Berger in Amsterdam, the situation today is similar to that in 1986. "The oil price was extremely low back then, but not because of a recession, which is often the case." OPEC countries were flooding the market with oil, creating oversupply in order to win back market share from Russia. Today, countries like Saudi Arabia have decided to keep production levels as they are in order not to lose market share to the Americans. Frans continues, "A brief period of overproduction generally does not affect the oil price, but for seventeen months now there has been a surplus of an average 1.8 million barrels a day."

The question is how long this will last. Shell director Ben van Beurden announced in early January that "The oil prices we are seeing today are not sustainable and predicted that they would return to higher levels". BP CEO Bob Dudley believes that by the end of the year, a barrel of oil will cost around USD 50. Patrick Pouyanne from Total does not see any price recovery. Jeffrey Currie from Goldman Sachs and David Lebovitz from J.P. Morgan both believe prices may briefly drop even more, to USD 20 or even USD 10 a barrel.

For 2016, the IEA, NYMEX and EIA predict a small increase in the oil price to around USD 46 per barrel. Van der Slot explains, "They believe that the overproduction will continue since demand is growing so gradually. And what's more, production costs in most OPEC countries are lower than the current price. Even though they have to cut their government budgets, their backs are not against the wall."

Production countries are now basing their budgets on a price of USD 38-53 a barrel. To increase the oil price towards USD 50, they have to get rid of the surplus or pull back and put less oil on the market. "At the current oil price, the OPEC countries are contending with budget deficits," Frans explains. "By producing less, the price will go up. And they would still hurt American shale oil producers, because a price of around USD 50 a barrel still isn't enough for them."

Do you want to receive more information or do you want to get in contact with partner Arnoud van der Slot or principal David Frans please send Eline van Loon (eline.vanloon@rolandberger.com) a message.

Feb 11, 2016

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