Oil Futures Market Is Better Predictor Than Analysts

Oil Futures Market Is Better Predictor Than Analysts
By Bill Murray
Oct. 9 (Bloomberg)

The crude futures markets in London and New York have been more accurate predictors of oil prices than market analysts during the past eight years, Deutsche Bank AG said.

The average forecasting error by the crude futures market since 1999 has been 17 percent, compared with 31 percent by a group of more than 30 oil analysts surveyed by Reuters, senior analysts Michael Lewis and Adam Sieminski said in a note to clients published Oct. 5.

``The hidden truth behind analyst oil price forecasts is that they have more to do with the current spot oil price than prospective oil market fundamentals,'' they wrote. ``We find that for the past nine years the analyst community has consistently under-estimated the oil price.''

In the 1990s, crude traded between $15 and $25 a barrel 85 percent of the time. In the present decade, it has averaged $42 a barrel with greater price volatility, the report said.

Oil prices have quadrupled since January 2002 as surging demand, led by China and the U.S., has left a narrower margin of spare capacity to tap during supply disruptions.

Hurricanes in the U.S. Gulf of Mexico in 2005 and cuts in production from the Organization of Petroleum Exporting Countries helped spur oil prices, which reached a record $83.90 on Sept. 20 this year.

Crude oil for November delivery was up $1.53 at $80.55 a barrel in trading on the New York Mercantile Exchange at 4:06 p.m. London time. Brent crude oil for November was at $77.41 a barrel, up 83 cents, on the London-based ICE Futures Europe exchange.

Brent at $87.80

If the average absolute forecasting error of analysts persists through next year, that would imply Brent crude oil prices in 2008 will actually average $87.80 a barrel, the report said.

The average absolute futures market forecasting error would price Brent at $88.20 a barrel in 2008.

Deutsche Bank itself said oil may fall below $70 a barrel by the end of the quarter as demand for gasoline in the U.S. weakens along with the economy. Oil prices will average $60 a barrel in 2010, the Frankfurt-based bank said.

While oil prices probably won't fall during the fourth quarter as much as they did last year during the same period, fading geopolitical risks, OPEC production growth and economic weakness in the U.S. mean prices are still likely to decline, Deutsche Bank said.

Fuel Consumption

``Futures are saying that in two years prices will be in the low $70s,'' Siemenski said in an interview. ``In addition to the fundamentals of crude, demand has been eroded. Demand has been flat in the U.S. for the past two months.''

U.S. fuel consumption in the four weeks ended Sept. 28 averaged 20.45 million barrels a day, down 0.3 percent from the same period a year earlier, according to the Energy Department.

The Paris-based International Energy Agency, an adviser to 26 industrialized countries, reduced its forecast for global oil demand last month on lower estimates for U.S. economic growth.