So are analysts and government agencies EVER going to get their forecasts of the oil price right…?
Since 1985, US government oil-price forecasts have been consistently wrong. They may as well have been prepared by Mystic Meg for all their baring on reality. The best the government analysts have done was a 6% error over that time – the worst a 116% forecast miss.
Investment bank analysts have not been much better – but they are getting better and better as time goes by… However, I think the discrepancy between forecast and reality is enough to turn a nice profit for savvy investors.
At the moment, the investment banks have been getting better. For example, UBS’s current forecast for 2007 is $60 a barrel, with Merrill Lynch at $65. Many brokers are concerned about slower growth in the US hitting demand, but I think these concerns are overdone. History shows that brokers always under-predict the oil price – and it appears that they are doing it again.
If oil prices don't fall much further from their current level 2007 will be the ninth-consecutive year that the "market consensus" was too low.
This is significant… and, yet again, has provided you with a money-making opportunity.
When oil companies’ results are released, the figures are generally above consensus and the stock is rerated.
A major broker’s oil team will have their forecast used in all models from its analysis. So, integrated oil companies earnings will always come in ahead of consensus where these low forecasts are being used. It is this fact that drove gains in the oil majors for quarter-after-quarter-after-quarter.
I believe it’s about to happen again…
I have told you before that I believe that analysts’ consensus forecasts are too low and I think the opportunity has arisen yet again to grab some integrated oil gravy. News this week has reinforced that view for me.
It has been widely reported this week that Opec has set an unofficial target oil price of $70 per barrel. It aims to use its influence to keep the oil price at that level going forward.
It will not raise output because the cartel thinks that the market is well supplied. I bet that this will remain Opec’s view as we head into winter and refineries start ramping up their production. That will send the oil price higher.
Opec next meet in Vienna on 11 September. Do not expect an increase in output. In fact, if they did announce an increase in output, I’d be utterly astonished.
I saw an interesting quote when reading an article in a US newspaper on the subject last week. It was from Adam Sieminski, the chief energy economist at Deutsche Bank's New York office. He said: “The old rule of forecasting is that if you can't get it right, do it often.” This is the way analysts at big investment banks cover their tracks as they know they always get it wrong.
These analysts get paid a fortune for getting it wrong. The world is a crazy place. However, you can profit from their incompetence by buying an integrated oil company right now.
The sector has been on the slide since the start of August, with recent concerns about the global economic outlook dampening the sector. This has presented you with a buy opportunity. I think you should buy European integrated oil right now. The sector is an utter bargain.
