U.S. Fixed Income

Forecasting Oil Prices: Six Vital Indicators

November 21 2022

Commodities markets—and oil in particular—are pretty complex and driven by a wide range of global factors. I approach my analysis of these markets from two broad perspectives: I monitor short-term indicators that inform changes that are part of the commodities price cycle, and I examine longer-term indicators that drive the more structural, or secular, price level.

The short-term indicators include inventory levels and changes for oil and petroleum products. Low and decreasing inventories are bullish, while high and rising inventories are bearish.

Profit margins for refiners are a good barometer for the strength of oil demand. Generally, higher margins indicate higher demand.

A final short-term driver that I monitor is the relationship between supply growth and demand growth. If supply growth is persistently outpacing demand growth, that is less supportive for prices and could ultimately turn bearish. When this relationship starts to change, I look for eventual shifts in the other indicators.

Turning to longer-term indicators, I examine how prices relate to the cost of production. I think of this relationship as the “fundamental gravity” of the market. Prices should eventually converge to marginal cost, or the minimum price required for producers to pump one additional barrel of oil. Looking at the current price versus that level provides critical insight for the secular oil picture.

I also follow the balance between supply and demand projections for how they will change. This can help shed light on inventory trends and determine when a surplus will become a glut or when a deficit will become a shortage.

Finally, one of the longer-term indicators that I monitor most closely is the forward curve, or the price of oil for delivery on specific dates in the future, which provides important market-driven insight. Oil isn’t just one price—it’s a collection of prices for delivery on future dates that reflects constantly changing market expectations.

There are times when short-term factors drive everything in the oil market, and there are times when only the long-term factors seem to matter. In 2022, we seem to be in a phase where the short-term drivers dominate, but that’s slowly shifting toward the longer term, in my view. Of course, these are just some of the range of indicators that I follow.

My overarching goal when analyzing the oil market is to be secularly aware but not cyclically blind—and also the reverse. From a broad perspective, it’s important to be aware of both as well as when one matters more.

Key Insights

  • It is important to examine both short-term oil market data that inform cyclical price changes and longer-term indicators that drive the more structural price.
  • There are times when short-term factors drive everything in the oil market, and there are times when only the long-term factors seem to matter.
  • The overarching goal when analyzing the oil market is to be secularly aware but not cyclically blind, and also the reverse.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of October 2022 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual outcomes may differ materially from forecasts or expectations.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. All charts and tables are shown for illustrative purposes only.

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