Article

Reasonable Predictions of Oil Prices: Why is it So Difficult?

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Abstract

The beginning of the new century was marked with another petroleum boom and bust cycle. Oil prices were hovering around $18-20/bbl through most of the 1990s after which crude prices collapsed to $10/bbl in 1998 and 1999. Soon thereafter oil prices began a steady and, at times, sharp rise on the way to $147/bbl in July 2008. This climb was followed by an abrupt decline after the onset of the global “Lehman” economic crises in September 2008 driving down the crude oil price to as low as $32/bbl in December 2008. After a relatively swift recovery, another oil shock “market share” took place in 2014-2016; average oil prices plunged from $108/bbl in the second quarter of 2014 to $30/bbl in the first quarter of 2016. Brent kicked off 2018 with average oil prices of $69/bbl in January toggling around the $85/bbl during October 2018; since then, however, oil prices were dwindling from $80/bbl to $51/bbl by 2018 year end. The year of 2019 started with a fluctuating Brent oil prices around the 55-65$/bbl range. The rapid increase in the oil price and its sudden and dramatic decline raises a fundamental question about the oil industry: Why is it so difficult to accurately predict the price of oil? Supply-demand balance, economic growth, oil inventories, and spare capacity are market fundamentals that drive oil prices and market dynamics. Market financialization, resources availability, technology advancements, and geopolitical events are also important drivers of oil price movements. Collaborative efforts should be geared towards: an acceptable and reasonable level of oil prices for the benefits of oil producers and consumers alike; meeting the future oil demand and availing adequate spare capacity to the market; and incentivizing upstream capital investment. Reasonable predictions of oil prices require a reliable and consistent data, rigorous advanced analytical methods, intelligent forecasting tools, and a better understanding of the influential factors impacting the oil prices and oil market conditions.

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