Oil: crude prediction

In early July crude oil prices peaked at a record 147 dollars per barrel. This was the culmination of months of discourse proclaiming an era of constantly increasing oil prices. One analysis, released on August 8 predicted  that oil would easily break the 200 dollars per barrel mark within a short period of time -- the extraordinary growth in demand from developing economies such as China and India being mainly to blame.

Oil has declined since to 113-114 dollars a barrel. During most of the month of July the market remained highly volatile, as any bad news -- whether it be rebel attacks on the oil infrastructure in the Niger Delta or reports (including those yesterday) that crude inventories were not what the market thought they were  -- induced wild ups and downs in a matter of hours. Spreads of more than five dollars were common. But oil did not regain its former highs.

Oil exporters, such as Saudi Arabia, resoundingly disagreed with the idea of a ‘new world’ of permanently high prices, as did politicians from oil consuming countries. Investment in commodities as an asset class exploded in the last five years, they noted, and in so doing drove up prices. Major pension funds with billions under management began to allocate a few percentage points of assets to commodities such as oil. Even Alan Greenspan (hardly a critic of free markets) suggested to the Financial Times last week that the recent spike was due to speculation -- but a 'good speculation' that reflects a well-functioning market. This probably does not comfort investors that believed all the talk of ever increasing oil prices and now find themselves heavily in the red.

Even if higher demand proves them right in the long term (having lost their shirts), recent market movements prove the ferocious difficulty of predicting the oil price. A recent Bloomberg article notes that its oil economists’ survey “has correctly predicted the direction of futures 48 percent of the time since its start in April 2004” - that is, with slightly less reliability than a coin-toss.