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)

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