Oil Price Predictions Are Essentially Meaningless

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Oil Price Predictions Are Essentially Meaningless

On September 28, 2014 crude oil was trading at $94.57 a barrel. By January 27, 2015 it had dropped 52% to $45.23. This caused Resource stocks such as Vanguard Energy (VGELX) to lose 14.22% last year.

Crude Oil through 2015-02-18

The last such precipitous drop was in 2008 and it was for much the same reason: the strengthening of the U.S. dollar.

Crude Oil through 2015-02-18

Rebalancing is always a contrarian move, buying what has gone down and selling what has gone up. Nevertheless, it is the more profitable decision, and its value grows with greater volatility.

Oil is currently trading at $51.30 a barrel. While it may go lower, Vanguard Energy is a better buy today than it was back in September.

To show how helpful making a knee-jerk investment decision based on the current price of oil is, the following is a list of headlines predicting future oil prices with my comments in italics:

2014-10-01: Cheap oil ‘a mirage’ and heading to $140: “There hasn’t been a moment in history that I can remember where future production wasn’t at risk in so many places.” And yet prices were just about to drop.

2014-11-11: Stronger dollar could mean $30 oil: “Prices in oil could go down to $30, $40 easily if the dollar moves in the way that I’m thinking it possibly will.” Overstating the price by 50%, but they got the cause right.

2014-12-01: Oil Prices Headed For $30 A Barrel: “Now many analysts are willing to speculate about oil at $30 or $40 per barrel, and fear disruption to the global economy as a result.” By this date most of the drop is already complete but they are predicting it will drop another 55%.

2014-12-05: Why the world missed the oil price crash: “The past decade has taught us that oil prices are rarely stable for long…Only the reckless would bet with any confidence on one particular outcome.” And yet the reckless continue to speculate.

2014-12-18: Where Are Oil Prices Headed In The Long Run?: “We expect annual average crude oil prices to continue to decline in the short to medium term and bottom out by 2017 to reach $100 per barrel by 2020.” Meaning if it bottoms out any time in the next two years or reaches $100 a barrel before 2020 they can claim they were correct in their prediction even if their timing was a little off.

2014-12-30: Why Oil Will Probably Stay Cheap in 2015: “Making predictions about the price of oil is sort of foolish.” Right.

2015-01-06: Oil and the Economy: Where are We Headed in 2015-16?: “Because of the higher interest rates, oil prices will have to rise to an even higher price than required in the past–in other words, to more than $100 barrel, say $125 to $140 barrel.” Another bold claim which is probably vastly overstated in the near term.

2015-01-08: Wall Street isn’t feeling so ‘super’ about the oil trade: “Wall Street traders think oil prices will be 35% higher in five years and $65 a barrel by early 2020.” All this means is that the market sets a price for oil futures.

2015-01-09: Why Oil Prices Are Headed Below $35 a Barrel: “It’s clear that a quick reversal isn’t coming.” It’s obviously not clear to everyone.

2015-01-12: The price of oil in 2015: “Oil prices may continue to drop in the short term, however, they are likely to finish the year higher than they were when it began…I used to joke that the most important thing I learned from my research was never to attempt to forecast the price of oil.” And yet you continue to forecast the price of oil.

2015-01-13: Demand likely to drive oil prices higher: “The only consensus is there is no consensus. Everyone’s got an opinion about where oil prices will go. Many of them contradict each other.” Amen.

2015-01-14: Will Collapse in Oil Price Cause a Stock Market Crash?: “The simplest prognosis would be to anticipate that a fifth spike should occur sometime in 2017-2018.” I can think of some simpler prognoses.

2015-02-09: Why Crude Oil Prices Are Guaranteed to Surge Higher: “With crude oil prices sitting just above $50 today, oil is a buy right now…and I have just the stock.” Hold onto your wallet.

2015-02-12: Oil Prices: Heading Back to $100!: “Oil prices could surge above $100 a barrel again.” Yes, they could. Or they could not.

2015-02-17: Get Ready for $10 Oil: “Crude oil prices may fall more, perhaps even as low as $10 to $20.” Another bold claim which is probably vastly overstated.

2015-02-18: Why Oil Prices Must Go Up: “Long lead times on new oil projects mean that the dearth of discoveries in 2014 don’t have much of an effect on current oil prices, but could lead to a price spike in the 2020’s.” If oil prices are so difficult to predict in the short term, why do people think they are easier to predict five years from now?

2015-02-18: The future price of oil? Nobody has a clue: “Oil prices could plunge to as low as $10 per barrel. Or they could soar to an unprecedented $200 per barrel…Oil price predictions are essentially meaningless.” Amen. This is probably the best video to watch.

Here’s my speculation: I am certain that, going forward, oil prices will ultimately cross $100 a barrel (going up or down) an odd number of times. Like most speculation, it sounds specific, but is actually so vague as to be entirely useless. Remember that the next time you hear “experts” predicting the future price of oil.

All that being said, energy companies are a strong component of a balanced portfolio because of their low correlation to bonds and other stocks. Their volatility does not need to be timed to achieve your financial goals.

Photo used here under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818…)