View from City Road: Slippery task of forecasting oil price

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The Independent Online
Degolyer and MacNaughton, the consultants who prepared the asset valuations for Lasmo's last defence salvo, were careful to stress that their findings were 'scenarios' based on 'assumptions' about the oil price.

Wisely so. The past 20 years have provided ample proof of the unpredictability of oil prices and the danger of making definitive forecasts.

Since the early 1970s the oil price, which has kept pace with inflation over the period as a whole, has peaked and troughed spectacularly, darting to more than dollars 40 a barrel and then tumbling to single figures.

That is why, for general long-term forecasting purposes, the likes of the brokers Lehman Brothers use the current price, uprated for inflation.

At the moment Brent crude is trading at about dollars 16.50 a barrel. The consensus is that the next 12 months will see the average remain around that level, with the odd lurch up and down.

Short-term volatility will probably be provided by Iraq. The signal that the United Nations will allow it to start selling oil again, expected in the autumn, is likely to prompt some softness in the price as traders worry about oversupply.

Beyond Iraq's likely re-entry in 1995, however, the glass grows very dark. The general expectation is that demand will continue to rise but that increased capacity will be slow to come on stream, and so prices will tighten.

The big producer, Saudi Arabia, will be reluctant to further expand capacity without a period when prices average dollars 2-3 a barrel more than at present. Yet the Soviet Union's 2.5 million-barrels-a-day net exports to the West are likely to continue to shrink until the end of the century.

So Brent could edge up to dollars 19 in real terms by 1998 and prove Degolyer right - but how long it would stay there would depend on such unguessables as internal Saudi politics and the rate of world economic growth.

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