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Alexander Khurshudov: in a years time I expect the Brent price in the interval of $63-81 for a barrel

Alexander Khurshudov, expert Oil and Gas Information Agency
January 06/ 16:16

It is pleasant, when your forecasts come true. You can put on airs and feast your ears with praise, looking down on the other fortunetellers, whose predictions missed the target. Though, this was a joke. 

Speaking seriously, it is nice to know that you assessed all the important factors and probable events correctly and the result proved you right. Despite all praise or curse. 

It has become trendy to claim that movements in oil prices are impossible to predict. This is not true. It’s just that any forecast is a probability. Last year I published weekly forecasts and the probability of their completion was 75%. This is a good result. In October Brent formed a growing trend, which helped to make an accurate forecast for the end of the year (pic.1).


Pic.1

Brent came to the end of the year with the price of $56.74 and this inspired me to make the next forecast, for the whole coming year 2017. At the same time I decided to demonstrate the logic and the stages of forecasting to the readers, so that they had an idea about the job. But first of all I’ll say about one general rule.

I consider only FACTS, but all kinds of speculations, comments, recommendations and other idle talk of different babblers, savoring oil topic, may go down the drain. Otherwise, the abundance of it can make you go dizzy. I’ll give an example to illustratethis point.

“Next year American shale companies plan to increase investment into exploration and production, thanks to the recovery of oil prices… North American oil and gas producers will increase capital expenditure by 30% in 2017, according to the analysts from Raymond James… banks have expanded credit lines for 34 producers by 5% or over $1.3 billion on average”…

This is a typical disinformation. After cutting the capital expenditure FOUR times, 30% growth won’t take you far, even with the support of the whole army of anonymous analysts. And the increase of credits by $1.3 billion with the capex volume of $80 billion is just nothing. Besides, they expanded credit lines for some producers, but cut them for the others. Such “news” goes to trash. Now let’s get down to business.

1. The main basis for a forecast is a TREND. A stable tendency in price movements. Traders say that a trend incorporates everything. A man can’t decide which will overweigh: the war in Iraq, the strengthening of the Dollar, OPEC’s decision or the recession in the EU, but the trend can. It is formed considering ALL the circumstances. 

2. The scale of trend should correlate with length of the forecast. In this case I am making a forecast for the year to come, consequently I have to look for a trend in weekly or monthly charts. I’ve chosen monthly ones and here is the trend in the picture 2.

Pic.2

3. This is a growing trend. It began last February and it has a good chance to last for another year. Since the previous trends: falling one (2014-15), sideways one (2011-2014) and the growing one (2009-2011) lasted for 1.5-3 years. The trend channel is a bit too wide, $18 for a barrel. But this can’t be helped: the longer the forecast is, the less accurate – it is. If we fancied making a five-year forecast, we would have to use annual charts, and the trend channel would be even wider. By the way, we can’t make such a forecast now, because we are now in the zone of trend change.

4. Consequently, if the trend stays the same, the Brent price should be in the interval of $63-81 by the end of the year, which corresponds with the 11-43% growth.

5. Let’s check our trend against futures quotes. December futures cost $59.1 now. Consequently, the collective mind of the stock exchange is also inclined to growth, which is of course below the trend (4.2%), but this is a normal precaution against risks. 

6. It is possible to slightly adjust the price movements within the year. Fuel consumption during the winter is higher than in the spring, besides, the oil exporters will cut the production, so in January-February the prices are expected to rise. The rise won’t be too high, about up to $62, as a maximum up to $65, which is the top of the trend. Then drilling of the shale formations will facilitate, the production in the US will grow by several per cent by May, though it won’t last long. We expect a decrease to about $57, in the worst case scenario to $53, the bottom of the trend. The summer maximum is expected at $67, followed by a decline in the autumn, and by the end of the year we’ll have $70-72.  We’ve got a blue broken line within the trend channel.

NOTE: It is impossible to accurately predict the price movement in, say, September now, because it will depend on the events in July-August, but we don’t know them yet. So, the completion of this (within-year) forecast is not too high, I estimate it at 55-60% probability.

7. As the last step, let’s define the vents, which can push the price out of the trend channel (higher or lower). For the sake of convenience I arranged them in a table.

Table
The list turned out to be short and the probability of the events quite low too. Of course I estimate them veryroughly; this is a pure expert assessment. But if we combine the possibilities of all these major troubles, it turns out that the chances that our trend will survive till the end of the year is 72%. 

You see, it is not so difficult to predict oil prices. Let’s try to do it together?

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