Two steps forward and one step back

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The oil price continues to surprise most observers. Even though the price swings tend to overshoot on the way down as well as on the way up, the 20 dollar rally since mid-January have taken most analysts by surprise. It is quite similar to what happened during the fall when almost all experts underestimated the price drop and only caught up when the correction had played out.

The same thing happened back in 2008-09. And not only with the estimates was the price pattern very similar. The price peaked at 145 dollars per barrel in early July back in 2008, and fell to 38 by the end of December. By mid-May 2009, it had recovered 20 dollars to 58 just like what we have seen so far this year.

oil price

Source: MacroBond

But what about the outlook for the rest of this year? The future oil price obviously depends on a number of factors – many of which are extremely difficult to predict and may or may not work in the same direction or neutralise one another. The easiest thing to forecast may be global demand, even though that depends on economic growth assumptions that are inherently inaccurate, while supply depends on OPEC decisions, US shale production dynamics, as well as an eventual deal with Iran. On top of that we have the impact from trading and the extraordinary role played by central banks. Rather than guesstimating the impact of all these factors, we can take the price dynamics so far this year and extrapolate them.

Although it is true that the oil price has been volatile this year, the swings have followed a pattern of two steps up followed by one step down. The price dropped roughly 5 dollars in January, increased 10 dollars in February, dropped 5 in March and increased 10 in April. If this continues until the end of the year, we end up with a price around 85 dollars per barrel, which interestingly enough is 40 dollars above the trough – or exactly the same as we saw back in 2009 when the price closed the year at 78 per barrel, 40 dollars above the trough.

This is obviously not a scientific method and history only repeats itself sporadically. But the forecast may, at the end of the day, be just as good or equally bad as the more technical ones. And it is arguably not behind the curve.

 

Marcus Svedberg is chief economist at East Capital

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