By Christian Berthelsen
Want to know how much further oil prices might fall? Don't ask
Wall Street.
Analysts at big banks have been scrambling to lower their
oil-market forecasts after prices plunged to 12-year lows below $30
a barrel in January. As recently as November, banks were expecting
the global Brent contract for oil to average $57 a barrel in 2016.
Now, that number has fallen to $50 and could fall again.
J.P. Morgan Chase & Co. reduced its first-quarter price
forecasts for the second time in two months on Jan. 15. It expects
global benchmark Brent to average $31.50 in 2016--down from a Dec.
18 prediction of $51.50, itself down from a view held in October of
$54.75.
"We have that queasy feeling one gets in the early stages of a
vicious roller-coaster ride that is now slipping down the contours
of that abyss, " J.P. Morgan oil strategists David Martin and
Upadhi Kabra wrote in a client note.
Credit Suisse Group AG and Citigroup Inc. also have ripped up
their forecasts during the past two weeks. The Swiss bank now
thinks Brent will average $36.25 a barrel this year, down 38% from
its previous forecast of $58 in September.
Wall Street's revisionist thinking on oil is in part the fallout
of seven years of easy money from the Federal Reserve and other
central banks, which may have distorted asset prices and are
creating unexpected volatility across a wide range of investments
as the Fed starts to pull back.
The period of rock-bottom interest rates unleashed a powerful
stock-market rally that defied slow economic growth. Economists
have grappled to understand how inflation has remained subdued for
so long and why bond yields have barely budged. Few analysts
signaled the slowdown in China's economic growth that has been
upending commodity markets and the developing world.
Oil prices have been particularly tricky to forecast, in part
because years of cheap credit have enabled U.S. shale producers to
keep pumping longer than most expected. The margin between an
oversupplied and undersupplied market also can be very narrow,
while accurate data--and predictable outcomes--across the diaspora
of global producers and consumers can be tough to come by.
Credit Suisse's global energy economist, Jan Stuart, said the
bank's forecasts were thrown off last year by Saudi Arabia's move
to increase production at a time when global physical markets were
already flooded with oil, though continued booming production in
the U.S., despite increasingly uneconomic conditions, also played a
role.
"We underestimated the inertia in the system," Mr. Stuart
said.
Still, the dismal forecasting record is notable at a time when
oil is at the top of every investor's agenda.
"No one had any idea of where the bottom was," said Stephen
Schork, president of oil-research consultancy Schork Group. "That
was very difficult to model."
Wall Street did call one big turn in oil--the beginning a decade
ago of the run past $100. Goldman Sachs Group Inc. analyst Arjun
Murti drew headlines and raspberries when he declared in March 2005
that oil was in a "super spike" that could take prices to $105 a
barrel. Crude was trading around $55 at the time. Three years
later, it had shot past $100 on its way to a record of $146 in July
2008. Mr. Murti had a call that year saying it could hit $200.
The end to the multiyear bull market, however, has confounded
bank analysts. Oil, which mostly stayed above $100 a barrel until
mid-2014, began a long slide that took 75% off its value in 18
months.
Of the major Wall Street banks, Citigroup has fared best in
predicting the collapse in oil prices, saying prices could fall to
$75 a barrel in March 2014, a time when it was trading in the
market at nearly $110.
As the oil-market rout deepened in late 2014, analysts were
quick to predict a recovery in the second half of 2015. "We suspect
that the industry will react relatively fast to the new
geopolitical price environment of oil," Credit Suisse said in
December of that year. "We assume that with less of a supply
overhang in H2-2015 prices can recover further," calling for
average prices of $79 a barrel in that period.
Though the market did rebound last spring, prices have been in a
free fall ever since, and recovery scenarios have been pushed off
another year.
Oil markets are being moved by concerns about Chinese demand and
a supply glut that could intensify when Iran, free of sanctions
over its nuclear program, ramps up production and shipments.
The Organization of the Petroleum Exporting Countries and U.S.
producers have kept output high long past the point when analysts
and investors expected they would have scaled back to stabilize
prices.
The Federal Reserve's move toward a tightening posture signals
the era of cheap money may be ending as well, putting further
pressure on markets.
Some banks have shifted to making aggressive downside calls.
Goldman Sachs rattled markets in September when it predicted that
oil, then trading around $45, could fall as low as $20.
Barclays PLC and Societe Generale SA have consistently called
for prices to be well below consensus. While some bank peers see
2016 global oil price averages in the high $50s and even $60s,
Barclays is forecasting $37 a barrel and SocGen is forecasting
$43.
But even Citigroup, which has maintained one of the more bearish
outlooks, has since had to ratchet back its price estimate multiple
times to keep up with the falling market.
Last week, Citi said global benchmark Brent would average $40 in
2016. That was down from a forecast of $51 a barrel in
November.
The 15% slide in oil prices to start the year "requires us to
mark to market and reset our price expectations for the year,"
Citigroup said. "Unless material production declines emerge in the
next three to six months it will be hard to see much upside in
crude prices."
Georgi Kantchev contributed to this article.
Write to Christian Berthelsen at
christian.berthelsen@wsj.com
(END) Dow Jones Newswires
January 28, 2016 19:12 ET (00:12 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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