Oil price forecasting is complex and, with today’s market volatility, even more of a challenge for even the most experienced analysts. A wide range of factors exist that could influence the price of oil, from perceptions of international tensions through to something as simple as the basics of supply and demand. However, while oil prices may be unpredictable, the reality is that they can have a significant effect on refinery margins and profitability – peaks and falls, in particular, have the potential to be incredibly disruptive.
Future predictions for oil price
There is no single future oil price prediction and different analysts tend to use different metrics to produce either generalised forecasts or specific analysis. As of July 2018, a wide range of different potential oil price predictions exist, including:
- A surge in the price of oil to $160 per barrel as a result of closure of the Strait of Hormuz for oil transport, rising to $250 per barrel if the Strait remained closed for several months (Vladimir Rojankovski, International Financial Center in Moscow).
- An increase to $100 per barrel if oil prices are affected by US tensions with Iran, such as a “military accident” in the Arabian Gulf (Theo Matsopoulos, cited in Forbes).
- A more modest $85 per barrel as a result of a reduction in oil production in Libya and Angola and diminishing oil supplies in America (Morgan Stanley).
Supply and demand of oil products
Supply and demand for oil has a significant influence over the way that oil products are priced – lack of supply pushes prices up as does increased demand. Both supply and demand are heavily influenced by the oil reserves that are available to an individual country, determining how much that country needs oil and/or how much it can supply to others. Saudi Arabia, for example, currently has 267 billion barrels in reserve – the highest number in the world – whereas the US has 26.5 billion, Canada 174 billion and Russia 60 billion. In terms of where this oil ends up, around 45% of crude oil goes into cars, with the rest ending up in jet fuel and other oil products.
OPEC and infrastructure
Oil prices can also be influenced by other factors, including the way that Organization of the Petroleum Exporting Countries (OPEC) operates. For example, throughout the 1960s and 1970s OPEC restricted oil production to generate higher profits than if its member countries had each sold on the world market at the going rate. Finally, a lack of infrastructure can also push prices up – for example, while oil production in the US has reached a high, there remains a lack of refinery and distribution to keep up – America has built just one refinery every ten years. The 142 refineries in the US operate at only 62% of capacity – if they were at 100% then oil prices could be driven down quite significantly as there would be an abundance of oil. However, the more available oil, the lower the price per barrel and the smaller refinery margins become.
Oil pricing is dependent on many different factors and can have a far reaching impact on industry businesses. It’s not possible to predict future oil prices with 100% accuracy but an understanding of what can influence them is a good place to start.