Forecasting oil prices is the ultimate Holy Grail of analysis. Yet in an increasingly polarized environment where political agendas often overshadow the objective reality of global supply or demand, who could become the best forecaster? Ideally, someone who doesn’t play to the tune of oil producers that naturally seek the highest price possible for their crude or oil products, nor someone who benefits from doomsaying predictions aimed at lowering the cost of imports. We would argue that we, Kpler, had the most precise price forecast for 2023.
The US economist Edgar Fiedler once said, "if you have to forecast, forecast often”. That was certainly a recurring market trend in 2023 when expectations for a bullish spike to happen anytime soon never really materialized. Calls for oil to hit $110 or $120/bbl were repeated with religious fervour, first predicting it into the summer, then heading into the winter months’ high-demand season, only to see ICE Brent finish the year at a meagre $77/bbl, almost $10/bbl lower than year-end 2022. Looking back retrospectively to where the market stood in the first days of 2023, i.e. to bring all forecasts to a common denominator that reflected a balances-driven outlook rather than a sentiment-driven narrative, we compared some of the finest forecasters’ calls for the past year.
Let’s start with the necessary caveats. Forecasters predict different prices – we have been historically focusing on Dated Brent prices, which arguably should reflect supply/demand fundamentals more directly than the non-physically-deliverable ICE Brent futures contract. That said, the difference between Dated and ICE Brent was negligible in 2023, with the latter coming in at $82.57/bbl whilst the former averaged $82.17/bbl across the year. So, $0.40/bbl of a difference between the two, in the realm of forecasts that’s equivalent to the usual margin of statistical error. Looking back exactly a year ago, our Brent price forecast foreshadowed the following: we expected prices to peak in the summer months around $86/bbl seeing the year’s tightest periods in terms of supply/demand balances, with two periods of relative weakness in February-March and October-November.
The expectation of H1 balances being the longest in March did materialize, even if the subsequent rebound wasn’t as straightforward as the supply/demand situation could have predicted. May-June prices were subdued, and the oil market took several weeks to acknowledge the reality of OPEC+ production cuts that subsequently pushed prices above the $80/bbl mark again. The peak of summer tightness also didn’t immediately transpire in pricing as Brent hit its highest in September, a month in which refiners have already started to head into autumn maintenance, however the dearth of physical cargoes made the market realize how potent the OPEC+ output cuts had actually been. Late September saw the steepest backwardation in the Brent futures contract, as the month was winding down the M1-M6 spread was at a whopping $8/bbl, with more than $1/bbl between respective months.
We believe that the year-end decline in prices was driven mostly by sentiment rather than global crude balances. The almost $15/bbl difference between a maintenance-heavy October (that saw inventory builds of some 690 kbd) and December would be difficult to explain otherwise, especially on the back of sizable shifts in global trade flows triggered by the militarization of the Red Sea.
Our forecast from January 2023 had the annual average price of Dated Brent come in at $84.03/bbl. That is $1.46/bbl higher than what Dated Brent turned out to be and we struggle to see a similar forecast from a reputable analytical company that would be as close to the reality of 2023 as we were. Averaging our forecast for quarterly figures, we were $2.2/bbl off in Q1, $6.5/bbl off in Q2, $2.4/bbl off in Q3 and a mere $0.75/bbl off target in Q4. Of course, luck is an integral part of any successful forecast, and our case was not an exception. For instance, we expected much weaker demand in Q4 2023, predicated on the fact that the Atlantic Basin would at last see the immediate ramifications of higher interest rates and a gradually slowing down global economy.
Looking into 2024, we expect Dated Brent prices to average $81.13/bbl, slightly below this year’s total. In doing so, we expect the first half of this year to be tangibly weaker both in terms of market sentiment towards oil as well as actual flat prices themselves, staying in the high-70s for most of the spring maintenance period. It will only be the usual summer tightness to nudge Brent back on an upward trajectory, ending the year slightly above the $85/bbl mark. As opposed to our 2023 forecast when we were clearly the outliers in a pool of much more bullish forecasts, the 2024 outlook has consolidated in the $80-85/bbl bandwidth. Apart from our call, the EIA expects Brent to come in at $82/bbl, Goldman Sachs recently downgraded its call to $85/bbl, whilst Barclays expects $85/bbl. Citibank’s $74/bbl forecast stands at the lower end of forecasts, Bank of America with its $90/bbl for Brent in 2024 caps the upper limit amongst the mainstream forecasters. Given the minimal differences between the forecasts, carrying off the palm in 2024 might not be as straightforward as it was last year, but we will strive to get there eventually.
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