Oil Plunge: Who on Wall Street Got it Right?

FBN's Evan Falk contributed to this report.

The majority of Wall Street shops were off in their predictions made in late 2013 and early 2014 that oil would average anywhere from $83 to $100 a barrel this year. Included here: UBS (NYSE:OUBS), Barclays (NYSE:BCS), Deutsche Bank, Raymond James (NYSE:RJF), JPMorgan Chase (NYSE:JPM), HSBC, and Commerzbank (see bottom). A Reuters’ survey of 27 oil analysts in Dec. 2013 also showed they were expecting an average price of just over $100 for the Brent benchmark in 2014.

Continue Reading Below

One bank pro, Citigroup’s head of global commodity research, Ed Morse, came close with his prediction last March that oil would drop to $75; Barron’s Gene Epstein covered his call back then, noting that Amy Jaffe, an energy expert at the University of California, Davis, and Rice University economics professor Mahmoud El-Gamal also came close in predicting oil at $75. The two academics forecasted oil prices will "fall precipitously over the medium term of three to five years."

Barron’s also reported newsletter analyst Steve Briese, publisher and writer of the Bullish Review of Commodity Insiders newsletter, was also one of the few to currently predict an imminent plunge in oil prices to $70, based on hedge fund positions published by the Commodity Futures Trading Commission.

Everyone knows economic forecasting is about as reliable and as difficult to do as predicting the weather, and that Wall Street economists and analysts often sell astrology. For instance, many Wall Street analysts and Federal Reserve officials missed the financial collapse, the subprime mortgage crisis and the 1987 stock market crash. If Wall Street forecasters are so good, then why aren’t they accurately predicting commodities and stock prices, and retiring to Bermuda en masse?

But the oil price whiff also provides a warning to central bank planners, who often incorporate oil price forecasts in their monetary policies, no matter how much they rely on clinical algorithms to reduce subjectivity.

NYMEX crude oil has dropped 37% since its peak of $107.26 on June 20, dropping to a five-year low not seen since October 2009, as last week the Organization of the Petroleum Exporting Countries declined to curb production despite a surplus. On Monday, Brent fell to $67.53 a barrel and West Texas Intermediate dropped to $63.72, before bouncing higher. On Tuesday, Brent crude oil was sticking just above $70 a barrel, with talk it could trade between $70 to $80 a barrel, or a range as low as $60 to $70.

The supply-side blade of the scissors has rendered a cut in prices that has sent countries reliant on high prices reeling, including Russia and Nigeria, now facing economic turmoil. In addition, cars and trucks are becoming more fuel-efficient, driving down oil demand. If oil continues on this downward trend over the next ten years, experts say Russia could see another debt default similar to what it experienced in 1998, as oil-and-gas sales make up half its government income.

The hot debate now is whether Saudi Arabia and other OPEC members with their massive reserves have lost their power to balance oil prices with production cuts, as the U.S. oil boom continues.

Government data shows that in just the past five years, discoveries of crude oil -- deep-water oil, shale oil, and oil sands -- have amounted to more than a trillion barrels, equal to more than three decades of extra supply (warning: cost to recover is at about $75 or less.) The U.S. oil boom has the country positioned to potentially become a net exporter by 2020; the U.S. has been a net importer since World War II.

The optimism about U.S. production is so high, talk now is that even the Strategic Petroleum Reserve could be removed from the table as a counter threat to supply cuts. But reminiscent here is Goldman Sachs’ bullish $200 a barrel call in May of 2008, when oil was zooming towards $145 a barrel. The financial collapse ensued, and oil prices collapsed more than 75%, by December 2008, at around $30 a barrel.

However, oil prices do fix themselves, as exploration drops off because it is too costly to find oil, crimping supplies. The break-even price for developing new oil-sands mines is among the most costly in the world, at around $85 a barrel, says the Bank of Nova Scotia.

Still, because of the bearish outlook on oil prices, Societe Generale has now slashed its U.S. crude and Brent forecasts to an average of $65 for 2015 and $70 for 2016.

Here is a look back at the Wall Street calls. The winner, Citigroup’s Ed Morse, is first, as reported in Barron’s last March in “Here Comes $75 Oil.”

Citigroup's Edward Morse: Combination of plateauing demand and rising production should mean that "the $90-a-barrel floor on the world oil price over the past few years will become a $90 ceiling,” an average of $75 is plausible. “Most of the imports will come from Canada and Mexico. So the U.S. will no longer have to worry about disruptions in supply that might disrupt economic activity. That's why we call it the era of North American energy independence."

Henry Stokman, Seeking Alpha contributor: Wrote in April that new unconventional oil reserves in the U.S. require an average break-even price of $65, which does not justify or support a $75 price, as Citigroup told Barron’s. “Barron's assumes that all new unconventional reserves are here for the long term and will continue to increase production, which is not the case…after examining existing extraction cost data it is hard for the supply side economics to actually work out and support $75 oil for a sustained period of time.” Noted, too, that, according to the U.S. Energy Information Administration (EIA), worldwide consumption of petroleum products was expected to grow by 1.2 million barrels per day in 2014, and 1.5 million barrels per day for 2015.

Barclays: Brent $106, WTI $99 for 2014. In March, Barclays raised its 2014 crude oil price forecasts on expected higher oil demand and investor interest levels, coupled with low inventory figures and high geopolitical risks.

Deutsche Bank: Brent average $97.50 for 2014, WTI $88.75. Last January, Deutsche Bank slashed its 2014 and 2015 price forecasts for crude oil, saying it is now the most richly priced commodity in the world with several downside risks, including an increase in non-OPEC capacity and higher OPEC spare capacity. The bank cut its WTI price forecast for 2014 by 10.1% to $88.75 per barrel, and for 2015 by 10.5% to $85 per barrel. The bank trimmed its average 2014 Brent price forecast by 8.2% to $97.50 per barrel, and 2015 by 4.5% to $100 per barrel.

UBS:  Brent to average $105 in 2014. Last January, UBS Investment Research raised its Brent crude oil price forecast on a pick-up in U.S. oil demand and disappointing supply growth outside North America. The bank revised upward its 2014 Brent price outlook by $5 to $105 per barrel.

Credit Suisse: Brent to average: $102, WTI $92 in 2014. Last January, Credit Suisse revised downward its oil price forecasts for this year and the next on an expected growth in non-OPEC supply and return of material exports from Libya and Iran. It saw Brent crude averaging $98 per barrel in 2015, down from its previous view of $100.

Reuters’ poll of 27 Wall Street oil analysts (December 2013): $103.50 oil in 2014, predicted crude would fall due to low demand and high production, offsetting higher tensions in the Middle East and North Africa.

HSBC: Raised its 2014 Brent forecast to $100 in December 2013.

Raymond James: Predicted in November 2013 Brent will average $95, WTI $83.

Commerzbank: Said in November 2013 Brent would average $106, WTI $102.

JPMorgan Chase: Said in October 2013 Brent would average $112.

FBN's Evan Falk contributed to this report.