OREANDA-NEWS. Oil price forecasting is a difficult business. Just ask Hollywood. In Back to the Future Part II, Marty McFly arrives in Hill Valley in a time-travelling DeLorean on 21 October 2015 to find Texaco garages selling regular unleaded gasoline for $8.38/USG. Clearly, this vision of our present from the past — the film came out in 1989 — was some way off. Regular unleaded is retailing at just over $2.90/USG in California. And Texaco, now subsumed into Chevron, is not, as far as Argus is aware, selling nuclear fusion reactor fuel at its filling stations.

Market forecasters are having an especially tough time of it now, with major implications for the future behaviour of oil pricing. A new dynamic is in operation. Opec's decision last year to maintain its 30mn b/d agreed production level and not cut output to defend prices left the market to determine the clearing price of oil, based on marginal production costs in the US shale sector. "The principles and beliefs that served us well in the past are no longer as useful for analysing the oil market," BP chief economist Spencer Dale says.

Volatility measures that had all but flatlined between 2012 and mid-2014 have sparked into life again as the market tries to find the balancing point. The five-year forward Brent futures market was roughly $93/bl a year ago, and is now below $65/bl. Such a steep drop in forward pricing makes many projects look unprofitable. But high levels of volatility also subvert the very act of investment planning. Oil firms are forced to delay decisions on new projects because in the brave new world of marginal supply costs, it is much less clear where the price will eventually settle. "Under current conditions, the international oil market may remain unstable because there is a great deal of uncertainty in the absence of a market leader or anchor," Saudi oil ministry adviser Ibrahim al-Muhanna says. "This ultimately means the inability of current investors in the market to identify an appropriate price now and in the future."

Shell chief executive Ben van Beurden also sees the difficulties for an industry trying to plot its future. "Saudi Arabia's strategy and cohesion within Opec will remain key uncertainties," van Beurden says. "If they get it right and find a new balance, prices will recover — although it remains uncertain how fast prices will recover and at what level they will settle."

Oil price forecasts have become just as volatile as spot markets. Brent was projected to average $107/bl in 2015 in an Argus survey of market analysts carried out in August last year, an outlook that fell with the spot price in subsequent surveys (see graph, left). Deutsche Bank analysts pointed out in 2007 that there has been a strong correlation between spot prices and consensus analyst outlooks since 1990. Some avoid price forecasts altogether. The IMF prefers using futures market prices in its World Economic Outlook.

Marty McFly arrives in 2015 to find that his nemesis Biff Tannen has become extremely powerful and wealthy because he sent a sporting almanac back in time to his younger self so that he could clean up at the bookies. Oil market watchers do not have the luxury of knowing the eventual spot price. As Opec is no longer willing to be the agent that cuts supply, assumptions about forward pricing will continue to swing while the market comes to terms with the marginal cost of shale production. It's strong and it's sudden. It can be cruel sometimes. That's the power of volatility.

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Brent forecasts and spot price