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04 Aug 2016
Forecasting the price tag on Oil

Researchers seek ways to improve current methodologies

Oil is often a monitored commodity, when your buck moves, whole industries and whole economies might be shaped and defined. With the expense of oil�s decline in December 2015 to below $35 per barrel initially since 2009, the U.S. oil exploration and production (E&P) sector has slowed with a blip of their previous boom. The price of oil is really important to the entire process of E&P companies that many of the largest ones within the U.S. south declined to be on record in regards to the resources they watch and use to generate forecasts and make profitable business decisions continuing to move forward. So, what exactly is behind the all-important cost of oil and what�s the existing thinking on how to anticipate its next move? Oilman spoken with two professors with the University of Texas at Austin McCombs School of Business to determine.

Energy News



Market Status at Year-End 2015

In accordance with the International Energy Agency�s (IEA) December 2015 Oil Market Report, OPEC�s decision to scrap its official production ceiling and oil flowing can be a de facto acknowledgment of current oil market reality. IEA said that the exporter group has effectively been pumping when needed since Saudi Arabia convinced fellow members last year to keep from supply cuts and defend share of the market from the ongoing increase in non-OPEC supply.

IEA�s World Energy Outlook for 2015 exactly what to one scenario in which oil prices remain low with an extended period, with a new market equilibrium emerging at prices in a $50/bbl to $60/bbl range that lasts well into the 2020s before climbing to $85/bbl in 2040. That scenario makes certain market assumptions, including sluggish near-term economic growth; a stable Middle East through which key producers turn to increase their share of the market; and resilient performance from key non-OPEC producers, particularly U.S. tight oil.

The U.S. Energy Information Administration (EIA) in their Dec. 8 Short-Term Energy Outlook estimated that total U.S. crude oil production declined by about 60,000 b/d in November compared with October. Crude oil production is forecast to diminish through 3Q16 before growth resumes late in 2016. Furthermore, projected U.S. crude oil production averages 9.3 million b/d in 2015 and eight.8 million b/d in 2016.

EIA forecasts that Brent crude oil prices will average $53/b in 2015 and $56/b in 2016. Forecast West Texas Intermediate oil prices average $4/b less than the Brent price in 2015 and $5/b lower in 2016.

Forecasting

The fee per barrel of oil is established though all sorts of decisions that influence the provision of oil and its demand. Forecasting the price of oil, therefore, has traditionally been reliant on predicting those decisions. Because businesses that find trustworthy forecasting models can undertake boom and bust cycles with vision, researchers always look for solutions to improve on current methodologies.

Around three years ago, professors James Dyer and Joe Hahn in the McCombs School of commercial developed a new tool which utilizes information regarding the value of assets in real estate markets to estimate the basic principles of oil supply and demand along with the resulting price. Their study, which has been originally published in Energy Economics in 2014, analyzes 23 a lot of historical oil futures prices to model and forecast prices.

Case study was a part of an application of study that Hahn originally began working on for his dissertation anf the husband has continued to operate on within a bigger project on energy prices. One of many inputs towards the models that Hahn was creating was obviously a forecast of commodity prices, and oil was one of those commodities.

Hahn and Dyer dedicated to making a model that allowed them to develop forecasts that diverted from traditional subjective thinking seen in models according to supply and demand.

�We�ve been interested in mixers will allow us to come up with forecasts that are in a few sense objective,� Dyer said.

Models depending on demand and supply, Dyer said, tend to be more complex models that make an effort to collect information regarding various indicators of activities in terms of the production and consumption of an investment, such as oil or gas main, and also the balance involving the rates with the production along with the rates people of people commodities. Those models then require some assumptions about how precisely prices might respond to the changes in supply and demand, he was quoted saying.

One of many challenges of people models, he added, would be that the people who build the models make assumptions that reflect their different views or opinions and other estimates with the relative impact of modifications in gas and oil prices as supplies and demands change.

�Some of this change could be estimated from market information, but also in other cases, there exists relatively more subjectivity in the type of models compared to the kind of model that we have been developing,� Dyer said.

The model put together by Hahn and Dyer relies read more about information that is available available on the market and is reproduced by other folks with similar techniques. Their model, Hahn said, is founded on �the wisdom from the crowd, because we look at exactly what the companies are buying and selling relation to its futures data for oil.�

The people buying and selling those markets are running their very own proprietary fundamental/economic models, and they are placing bets on perhaps the cost is going to increase or down or what level the cost will be at in the foreseeable future.

�That�s all impounded in market data through futures prices,� he explained. �We use that data from your market - along with the composite of everyone�s individual expectations that impounds itself in futures prices - to calibrate our model. So we�re not putting some of our very own subjective judgments within the model.�

The forecast that comes from the objective model now offers bounds, Hahn said, explaining that whatever the expected value is virtually any forecast, chances are it will be wrong.

�What our forecast endeavors to provide is expectation with the error bound around what that expectation ends time,� he explained. �So should you examine where prices have fallen to today, it will be near the lower bound of these forecast.�

Hahn noted that a lot of fundamental forecasts missed the reality that OPEC would adopt the supply policy which has led to the current supply glut.

�That�s not at all something that has been grabbed for most models and couldn�t have already been found within a market-based model in the event the market participants weren�t anticipating it,� he stated.

With there being many unforeseeable factors that will forward and influence the cost of oil, Hahn said it is very important to update the aim model as that information shows up on the market.

Although Hahn and Dyer have not updated the model since study was published in 2014, the course notes said an addendum to the study with the update would be timely.

For now, these are taking care of much the same forecasting model for natural gas.

�We�re building some appliances connect with the cost of electricity, along with a forecast of the tariff of gas will be an important part of those models,� Dyer said. �We have a much those models on an open website to be used or manipulation with the public ideally over the following six months�

Dyer and Hahn intend to update the cost-of-electricity models often in order to be run with current forecast estimates which are determined by alterations in industry info on futures prices. The website, Dyer said, could be supplied by the vitality Institute for the University of Texas campus.

Energy News



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