December 2022 / VIDEO
Forecasting Oil Prices: Six Vital Indicators
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.
Transcript
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.
IMPORTANT INFORMATION
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass.
The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
USA – Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
© 2022 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.
Elliot Shue is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc., and a corporate credit analyst in the Fixed Income Division. He joined the firm in 2007 as an associate in the Corporate Actions Department before becoming a research liaison for the Fixed Income Division in 2010. Elliot assumed his current role in 2012. He earned a B.B.A. in international business and finance from James Madison University. Elliot also has earned the Chartered Financial Analyst designation.
