Despair at oil price predictions

Predictions from big banks are wrong often yet their confidence never wavers, observes Gaurav Sodhi.

Forecasters at investment banks remind me of clowns. They incite the same level of comedy and horror as their circus centric kin and they do it regularly. Take the oil price as an example.

Four years ago when oil prices were persistently above $100 a barrel, every bank and financial institution was scrambling to raise forecasts that persistently lagged the actual oil price. This led to the inevitable absurdity of banks almost competing with each other for the highest oil price call. Predictions of $150, $200 and even $300 a barrel were routine.

The same thing is happening now in the opposing direction. The oil price collapse has surprised everyone. The reaction of the prognosticators is not to sheepishly admit they got it wrong or to admit the impossibility of their job: it is to chase the actual oil price lower with equally absurd predictions for how low oil will go.

There is no shame in being wrong on commodity prices – they are almost impossible to predict and analysts tasked with doing so face an impossible job. Being wrong is not a problem. What gets me is the blind confidence and hyperbole of the industry.

This week Citi argued oil prices will fall to $20 a barrel. Less than 15 months ago they were forecasting $99 a barrel. Last month JP Morgan cut its oil price forecast from $82 a barrel to $49. Note that their forecast isn’t a vague $50 but a precise $49. Also note that the ‘smartest guys in the room’ ritually appear to lag the actually oil price in both directions.

Don’t waste time fretting the precise price predictions of the big banks. Investors should treat their hysterics with the disdain they deserve.

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