OIL CONSENSUS (Negative Consensus/Bull Market Indicator): Soothsayers calling for rebound in energy prices
Oil prices have taken a big hit in the last few months with prices falling as much as 25 percent. Many elements are in play to cause such a pullback, specifically a rising US dollar, increased supply coming online especially in the US and the Middle East and waning demand in Europe and China. There doesn't seem to be anything that is going to upset these trends at this point, however, the Soothsayers appear to forming a consensus that oil prices will instead head back up to its triple digit levels.
While Brent crude for next month delivery has fallen 25 percent since June to $86.03 a barrel yesterday, the price for 2020 contracts was down less than one-fourth that to $91.53.
Today’s prices can’t “be considered the new normal, or at least not yet,” Paul Horsnell, head of commodities research at Standard Chartered Plc in London, said by e-mail yesterday. “The back end of the curve does seem happier above $90.”
“We don’t see a sustained period of oil below $100 a barrel due to the high marginal cost in some key areas,” Iain Pyle, a London-based oil and gas analyst at Bernstein, said by e-mail Oct. 21. “We’d expect production to be cut back. Investments in future developments will be canceled.”
Standard Chartered expects a faster rebound, predicting Brent will average $105 a barrel next year and $115 in 2016. Bernstein forecasts an average Brent price of $104 a barrel next year, rising to $110 in 2016.
“Long-term marginal costs in oil production are well over $100 a barrel,” the Barclays research team including Mahesh said in a note yesterday. “It seems extremely unlikely that oil prices will remain below $100 for very long.”
In the almost 20 years that I have been investing, one of the areas I've observed where the consensus is consistently incorrect is when it comes to forecasting oil prices. The Oil Soothsayers have an impeccable record for being wrong. When they pound the table that oil prices will crash the opposite happens. So right now it is quite notable that the consensus appears to be quite vocal that the recent plunge is short term in nature, despite fundamentals and a supply-demand equation pointing otherwise. Based on this, it wouldn't surprise us to see oil test lower lows. That's not a bad thing as oil companies are among the best run companies in the world. They have demonstrated a capability to create tangible Economic Profit under a low oil price paradigm so if stock prices catch up and reset, it could provide an interesting buying opportunity.