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New Roland Berger study: Oil producing countries' price forecasts are becoming increasingly inaccurate

Munich, March 7, 2016

  • In 2015, oil countries estimated an average oil price per barrel of USD 95, while the actual average was USD 49
  • Their forecasts are important: Oil countries base their government budgets on them
  • Combination of more shale oil production in the United States and stagnating demand for oil is leading to oversupply
  • Production countries are now basing their budgets on a price of USD 38-53 a barrel

Oil producing countries' price forecasts are becoming increasingly inaccurate. For 2015, their starting point was an average oil price per barrel of USD 95, while the actual average was USD 49. Notably, forecasts from the International Energy Agency (IEA), the New York Mercantile Exchange (NYMEX), and the U.S. Energy Information Administration (EIA), are becoming more accurate. The three major institutions have seen the smallest margins of error since 2010. This is one of the findings reached by consulting firm Roland Berger in its study, 2016 oil price forecast: who predicts best? The study has analyzed the price forecasts from the largest oil producing countries and institutions since 2007.

"The combination of more shale oil production in the United States and the stagnating demand for oil despite a growing global economy is leading to oversupply and therefore to extremely low oil prices," explains Arnoud van der Slot, Partner at Roland Berger in Amsterdam. Both the countries as well as the institutions were surprising in their 2015 predictions. The institutions' forecast for last year was USD 73 per barrel WTI.

Nevertheless, Van der Slot believes that the countries are using the forecast as a political tool, deliberately aiming high. "If they predict a low oil price, they also have to cut their government budgets. That's not always an easy sell to their citizens. But now that the oil price has hit its lowest level in thirteen years, we're finally seeing budget cuts. And they're now easier to justify."

According to David Frans, Principal at Roland Berger in Amsterdam, the situation today is similar to that in 1986: "The oil price was extremely low back then, but not because of a recession, as is often the case." OPEC countries were flooding the market with oil, creating oversupply in order to win back market share from Russia. Today, countries like Saudi Arabia have decided to keep production levels as they are in order not to lose market share to the Americans. As Frans points out, "A brief period of overproduction generally does not affect the oil price, but for seventeen months now there has been a surplus of an average 1.8 million barrels a day."

The question is how long this will last. Shell CEO Ben van Beurden announced in early January that "the oil prices we are seeing today are not sustainable" and predicted that they would return to higher levels. BP CEO Bob Dudley believes that by the end of the year, a barrel of oil will cost around USD 50. Patrick Pouyanne from Total does not foresee any price recovery. Jeffrey Currie from Goldman Sachs and David Lebovitz from J.P. Morgan both believe prices may briefly drop even more, to USD 20 or even USD 10 a barrel.

For 2016, the IEA, NYMEX and EIA predict a small increase in the oil price to around USD 46 per barrel. Frans explains: "They believe that overproduction will continue since demand is growing so slowly. And what's more, production costs in most OPEC countries are lower than the current price. Even though they have to cut their government budgets, their backs are not against the wall."

Production countries are now basing their budgets on a price of USD 38-53 a barrel. To raise the oil price toward USD 50/bbl, they would have to get rid of surplus or pull back and put less oil on the market. "At the current oil price, OPEC nations are contending with budget deficits," explains Walter Pfeiffer, Partner at Roland Berger, who goes on to say, "however, it seems that many producers are preparing themselves to survive at an oil price of less than 40 USD/bbl. Players with mature fields in the North Sea and Central and Eastern Europe, as well as some North American producers, will have to launch radical restructuring programs and fight for survival. The related industries for oilfield services and equipment will be fully affected by these moves."

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