Calling a bottom, calling a top

In the new lower-price oil environment, one industry is booming — the business of calling a bottom, or the lowest point that will be reached by crude in this cycle.

Goldman Sachs already called it, projecting a 2015 low for Brent of $42/bl in the second quarter of this year, followed by a small bounce to average around $50/bl for the remainder of 2015. This call was made just as Brent made its most recent six-year low. For Swiss bank UBS, which today cut its crude price forecasts for the second time in eight weeks, the process of bottoming out is “clearly under way” as “self-correcting market forces” begin. Cuts to capital expenditure should feed through to lower output, particularly among US independents, the bank said, and it too expects an average of around $50/bl for Brent in 2015.

But move away from the banks, whose price forecasts are the basis for their own investment decisions, and the use and meaning of forecasts become a little more opaque.

BP boss Bob Dudley caused a stir recently when he said oil prices could remain low for up to three years. But Dudley is not being a seer here. He is preparing the company’s shareholders for the full-year results on 3 February, when the outlook statement may be of more interest than the profit and loss account. Buckle up, he is saying. Don’t be surprised if this gets really rough.

The little hint of a warning from Dudley was echoed by Claudio Descalzi. The head of Italian energy company Eni said that overly dramatic cuts to investment will create a situation where the price of crude could leap to an unprecedented $200/bl. By doing this, both Dudley and Descalzi are using numbers in an attempt to reclaim the market narrative from Opec, which for years would say that the crude price, in its 2011-14 pomp around and above $100/bl, was good for everyone, for producers and consumers alike.

Opec no longer sings that song, and this allows others to talk about prices. In warning about both the bottom and the top of the cycle, Dudley and Descalzi are in different ways putting the same question out there: Is that what you want? Because that’s what will happen.

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