Making Sense of Oil Prices

Making Sense of Oil Prices

“THE EUROPEAN CENTRAL BANK has reviewed 9 different models for oil price forecasting and concluded that there is no single model that could give a good prediction. The ECB decided that a combination model provides a better predictive power. The ECB recommends a combination of four models: (i) Futures; (ii) Risk-Adjusted Futures; (iii) BVAR Model and (iv) DSGE Model.”

The above quote highlights how difficult it is to predict short or long-term oil prices! Yet there are O&G industry experts who try to do just that, hoping they can separate rational from irrational explanations. We have googled a selection of recent oil and gas pricing articles for a quick summary of current thinking. Here’s what turns up:

• The depletion of old oil wells is expected to surpass new sources of supply if the current softness in oil prices puts some items on a long list of oil and gas projects on hold. Energy consultants estimate that natural depletion rates could overwhelm new sources of supply because existing fields will continue losing at least 3 million barrels per day (mb/d) production in the coming year. This does not take into account rising oil demand.

• The EIA (U.S. Energy Information Administration) recently published its short-term energy outlook, which forecasts that the global oil price benchmark Brent will average $61 per barrel in 2019, while the U.S. oil benchmark WTI will trade at a $7-per-barrel discount to Brent, or at $54 per barrel.

• According to some consultants, actual demand for oil, especially in the developing countries, is much stronger than what the EIA reports. Saudi Arabia and Russia will force supply discipline to control the trajectory of oil prices, targeting a price level that is a “political” win for suppliers and consumers.

• Global storage capacity has shrunk because of oil tanker scrappage, which means there is less of an inventory cushion that historically has blunted price changes.

By now you should realize that – especially in the short term – predicting oil prices is speculative! But most experts will agree that longer term, oil prices will go up. So, investors should consider the following:
• When you invest in an oil and gas limited partnership, the investment lasts for years, over multiple business cycles in which oil prices will go up and down.
• Your investment is a hedge against inflation.
• You will get monthly revenue whether oil prices are high or low.
• Your return should be at least as good as what you get from Wall Street.
Finally, Warren Buffet says to be greedy when others are fearful, and fearful when others are greedy. Pay attention to Warren and invest in oil and gas when some of the news is negative.

At Allied Resource Partners, we make no claims that we are “smarter” than the so-called experts, but we try to exercise common sense when others overreact to what is reported. There is a plethora of data on the web, so please google for more articles if you wish to drill deeper…

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