Why Has Consensus Been Wrong on Oil?

“Over the last five years, energy industry observers and investors have consistently gotten the future price of oil very wrong. Why? Much of the reason seems to come from behavioural errors— overconfidence in forecasting, recency bias, anchoring, and other factors. A second component, however, is that many people threw visible data out the window. It didn’t seem to matter that activity slowed unsustainably and companies were unprofitable at $50/barrel of oil—this should have been a signal that the price was wrong, but few seemed to pay attention.

At this point, we believe the data still shows undersupply conditions, but we have now reached prices where activity should resume, although it will take some time for several years of underinvestment to be cured. Consensus continues to expect lower prices, but if companies remain disciplined on capital spending and the global economy remains strong, a spike in prices, even from current levels, remains on the table as a possible outcome.”

Patrick S. Kaser, CFA, Managing Director & Portfolio Manager, Brandywine Global (a Legg Mason affiliate),/em>