Forecasting the price tag on Oil
Forecasting the price tag on Oil
Researchers seek solutions to improve current methodologies
Oil is really a closely watched commodity, and when your money moves, whole industries and whole economies can be shaped and defined. With the price of oil�s loss of December 2015 to below $35 per barrel the very first time since 2009, the U.S. oil exploration and production (E&P) sector has slowed with a blip of its previous boom. The buying price of oil is so essential to the process of E&P companies that some of the largest ones inside the U.S. south declined to be record in regards to the resources they watch and rehearse to create forecasts making profitable business decisions continue. So, precisely what is behind the all-important tariff of oil and what�s the existing thinking on how to anticipate its next move? Oilman spoke with two professors at the University of Texas at Austin McCombs School of Business to find out.
Market Status at Year-End 2015
In line with the International Energy Agency�s (IEA) December 2015 Oil Market Report, OPEC�s decision to scrap its official production ceiling and oil flowing can be a de facto acknowledgment of current oil market reality. IEA declared the exporter group has effectively been pumping as you desire since Saudi Arabia convinced folks recently to keep from supply cuts and defend market share up against the ongoing increase in non-OPEC supply.
IEA�s World Energy Outlook for 2015 suggests one scenario by which oil prices remain low with an extended period, once you get your market equilibrium emerging at prices in the $50/bbl to $60/bbl range that lasts well in the 2020s before climbing to $85/bbl in 2040. That scenario means market assumptions, including sluggish near-term economic growth; a reliable Middle East through which key producers look to grow their share of the market; and resilient performance from key non-OPEC producers, particularly U.S. tight oil.
The U.S. Energy Information Administration (EIA) rolling around in its Dec. 8 Short-Term Energy Outlook estimated that total U.S. oil production declined by about 60,000 b/d in November in comparison with October. Crude oil production is forecast to diminish through 3Q16 before growth resumes late in 2016. In addition, projected U.S. crude oil production averages 9.3 million b/d in 2015 and 8.8 million b/d in 2016.
EIA forecasts that Brent oil prices will average $53/b in 2015 and $56/b in 2016. Forecast West Texas Intermediate oil prices average $4/b under the Brent price in 2015 and $5/b reduced in 2016.
The cost per barrel of oil is determined though a myriad of decisions that influence the production of oil as well as demand. Forecasting the price of oil, therefore, has traditionally been dependent on predicting those decisions. Because firms that find trustworthy forecasting models can undergo boom and bust cycles with vision, researchers carry on and seek out ways to strengthen current methodologies.
Three years back, professors James Dyer and Joe Hahn with the McCombs School of economic created new tool that utilizes information regarding value of assets in markets to estimate the basics of oil supply and demand as well as the resulting price. Their study, which has been originally published in Energy Economics in 2014, analyzes 23 a lot of historical oil futures prices to model and forecast prices.
The study was a part of a plan of study that Hahn originally began implementing for his dissertation and the man continues to operate on in a more substantial project on energy prices. One of the primary inputs on the mixers Hahn was creating was obviously a forecast of commodity prices, and oil was one particular commodities.
Hahn and Dyer dedicated to developing a model that allowed them to develop forecasts that diverted from traditional subjective thinking contained in models depending on supply and demand.
�We�ve been interested in appliances will permit us to get forecasts which might be in a few sense objective,� Dyer said.
Models according to supply and demand, Dyer said, are usually more complex mixers try and collect information about various indicators of activities due to the production and consumption of a commodity, like oil or gas main, and the balance relating to the rates from the production and also the rates of usage of the commodities. Those models then require some assumptions regarding how prices might reply to the alterations in demand and supply, he was quoted saying.
One of several challenges of people models, he added, is the people that build the models make assumptions that reflect their different views or opinions and different estimates with the relative impact of adjustments to oil and gas prices as supplies and demands change.
�Some of the change can be estimated from market information, but in other cases, there exists relatively more subjectivity in those types of models when compared to the type of model we have been developing,� Dyer said.
The model put together by Hahn and Dyer relies read more about information which can be found available on the market and could be reproduced by other folks employing the same techniques. Their model, Hahn said, will depend on �the wisdom with the crowd, in that we glance at exactly what the marketplace is trading relation to futures data for oil.�
The folks trading those investing arenas are running their very own proprietary fundamental/economic models, and they are generally placing bets on whether or not the price is going to increase or down or what level the price is going to be at later on.
�That�s all impounded in market data through futures prices,� he was quoted saying. �We use that data through the market - and the composite of everyone�s individual expectations that impounds itself in futures prices - to calibrate our model. So we�re not putting any of our very own subjective judgments inside the model.�
The forecast that results from the objective model even offers bounds, Hahn said, explaining that no matter the expected value is in any given forecast, it is likely to be wrong.
�What our forecast tries to provide is always that expectation by having an error bound around what that expectation ends time,� he was quoted saying. �So in the event you have a look at where prices have fallen to today, it will be towards the lower bound of the forecast.�
Hahn noted that a majority of fundamental forecasts missed the fact OPEC would adopt the provision policy that has triggered the existing supply glut.
�That�s not at all something which was acquired generally in most models and couldn�t happen to be grabbed in a market-based model in the event the market participants weren�t anticipating it,� he said.
Since there are numerous unforeseeable factors that can come forward and influence the buying price of oil, Hahn said hello is very important to update the goal model as that information appears out there.
Although Hahn and Dyer have never updated the model since the study was published in 2014, the trainer told us an addendum to the study having an update could be timely.
For now, they're implementing an identical forecasting model for natural gas.
�We�re building some mixers correspond with the expense of electricity, plus a forecast from the price of gas will likely be an important part of those models,� Dyer said. �We expect to have those models available on an open website for usage or manipulation with the public ideally within the next six months�
Dyer and Hahn plan to update the cost-of-electricity models often to enable them to be run with current forecast estimates which can be determined by alterations in the market industry more knowledge about futures prices. The website, Dyer said, will be provided by the power Institute about the University of Texas campus.