There are a lot of opinions about the price of oil. Some experts are suggesting the price could plummet to $10 per barrel while others are making the argument for $150 or more. The correct answer is that nobody really knows. However, we can’t stop reading about the predictions. We feel that a well-regarded bank’s estimate is a market-moving opinion that is based on a logical hypothesis but it is actually no better than a fortune teller’s palm reading.
West Texas Crude, the U.S. benchmark, ended in 2014 at about $53 per barrel. The following predictions from about a year ago prove my point:
International Monetary Fund (IMF): $102
Goldman Sachs: $90
These are all respectable organizations that, between them, have hundreds of analysts, each making lots of money. They have chief investment officers who make even more money. With so many smart people making lots of money and having access to information, you would think they could make this type of prediction with some certainty. However, as you see above, that is not the case.
I find that the majority of analysts’ predictions will stay in a range that hovers around the current price. I am not sure if this a function of CYA or, in other words, they don’t want to be so far incorrect that they look foolish and lose their high-paying jobs. There are also outliers who get a lot of attention. Economist Gary Shilling is predicting $10-20 per barrel, T. Boone Pickens is expecting $90-100 in the next year or so, and the OPEC Secretary General Abdell El-Badr is pointing at left field and calling $200.
So why have the majority of past predictions failed and why will Shilling, Pickens, and El-Badr’s predictions fail? The predictions fail because there is information that the people making the predictions don’t have. For example, on the price of oil in the future, you would need to know what oil producers are going to do at different price levels. Will they keep pumping as the price goes down and the glut of supply increases? Also, you need to know how firms may adopt or invest in new technology that lowers their costs to earn a profit. Another big factor would be Saudi Arabia’s policy on pumping. Will they reduce their output during the glut to keep supply lower and prices stable or will they keep pumping to keep market share?
As I discuss in Chapter 2 of my book, The Art of Retirement, there is a lot of noise that confuses investors. Don’t be distracted by this noise. Your attention should be focused on the proper asset allocation based on your goals, risk tolerance, and time frame. Speculating on the price of oil is a good guess, at best. If you decide you want to take the risk and add an oil- or energy-related investment to your portfolio, be ready to add more to it if the price goes down further; the price of oil will increase from its current levels but when, and how much, is anyone’s guess.
Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Investments are subject to risk, including the risk of loss. Talk to a financial advisor before making any investment decision.
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