Why I don’t have great expectations when it comes to market analysts’ predictions of crude oil

During my 30 years in the oil industry’s downstream operations, I have learned but one thing, and that is not to have great expectations of the market analysts’ expectations, because in more cases than I care to count, these expectations are no more than synonyms for self-serving, misguided guesses with the primary goal of securing a bigger font in the investor seeking headlines. This is why my whispered name is, The Great Rantler of the North. Give me a cause to rant about and I will rantle (my own Google proof verb), relentlessly.

 I hope you won’t be as tired about reading it as I am weary of writing on the subject, but the latest pronouncements by the revolving door guesstimators at Goldman Sachs, the investment bank full of cream of the crop market analysts, in my opinion, should be divested because to me, their pronouncements are indigestible. Goldie Sachs comes out with their crude oil price expectations with the frequency of those weekly junk mail fliers – and I would suggest that investors and consumers treat their price calls with as much thought as Goldie has given the calls, which is not much.

 In support of this barb, I offer the following summary of the Goldie forecasts for the 2016 price of crude:

·        On January 20 of this year, the call was for $20/bbl, but this was doubled to $39/bbl on March 4, and;

·        On May 16 their call was for $50/bbl, which is not a long limb to climb on to when crude was already near $48/bbl.

It is either a brave man or a careless one that fills in the Sudoku matrices in ink, so any forecasting or budgeting based on investment bank analysts or other non-industry experts should be written with a pencil in one hand and an eraser in the other.

 Okay, so now that I have smashed that forecasting window to smithereens, what is the alternative?

 One would think the answer would be supply and demand. How much crude is there to refine, and how much demand is there for the refined products? Those used to be the simple mathematical factors, but another eight have been added, most of which are subjective and subject to Goldmanian levels of guesswork. But even if we look at published, as opposed to theorized supply and demand data, the numbers can be like comparing apples and oranges, which adds more haziness to the crystal ball of any short-term, let alone long-term, pricing estimate of any petroleum commodity.

 The only two reporting entities are the EIA, a subset of the U.S. Department of Energy, and the industry sponsored American Petroleum Agency (API). If you think that these two organizations would agree on the weekly national inventory picture on a regular basis, thereby offering some tools for reliable price forecasts – forget it!

 Looking at the crude oil numbers over the last two weeks proves this:

·        Last week, the API said crude levels increased by 3.4 million bbls while the EIA said they went down… you guessed it… 3.4 million bbls!

 So the difference should correct itself this week, right? Nope.

·        This week, the API numbers decreased by 1.1 million bbls while the EIA numbers increased by 1.3 million bbls.

 I sure hope these guys have some good accountants doing their tax returns.

 Now how do I de-rubic this pricing cube? It’s simple – by elimination. Eliminate the, “Hear ye, hear ye!” ring a bell pronouncements by any financial institution, ignore all inventory data provisions by the API, and use the unbiased EIA inventory information as the basis of the answer to where we go from here.

 Because you can’t get there if you are not sure where you’re starting from.

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Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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