There's a lot of doom and gloom in the oil market this year. All we need to do is take a look at some of the recent headlines. Here's a few that caught my eye over the past few weeks:
- Why Oil Will Fall To $40 As Obama Looks The Other Way
- The Case for $35 a Barrel Oil
- Goldman's Cohn: Oil could go to $30
- Oil Falling to $20? Citigroup Thinks It Can Happen
- Get Ready for $10 Oil
In each case the argument being made is that oil companies are producing too much oil as demand remains weak. It also doesn't help the fact that OPEC is unwilling to do anything about it, with some saying it has lost its power and that its reign as oil king is over. While all make compelling arguments, there just seems to be a race to the bottom. It is as if there is some mysterious prize for the analyst that can compellingly scare the you know what out of the market with the lowest oil price on record.
Crying wolf, again
What's funny is that we can find many of the same headlines calling out extremely low oil prices in 2009, which was the last time the price of oil crashed. Here are a couple I found while searching the Internet.
- Oil Moving Toward $30 Per Barrel?
- Energy Expert: Oil will Fall to $20 a Barrel
- Oil Will Crash To $10 A Barrel
The storylines are the same. Supply and demand is out of whack and we simply have too much oil. It also isn't helping matters that OPEC can't do enough to fix the problems. I'd be willing to bet anyone reading those articles today wouldn't be able to tell the article was written over five years ago if it wasn't date stamped.
In both 2009 and 2015 those calling such a dramatic bottom in the price of oil make a compelling argument. But, each take a unique route to get there. Some use weird technical analysis theories that point to a deep bottom because that's what the wave in their model is telling them. Others use a fundamental analysis of the market and say that because it costs OPEC $20 to produce a barrel of oil that means that $20 a barrel is what oil should cost. Others use historical precedents to plot out how far oil should fall this time around, while still others say that no, this time is different and therefore oil will fall even deeper. And so on, and so forth.
Here's the thing, oil analysts and the financial media are focused on winning the game of picking the lowest oil price because that's what scares the living daylights out of oil companies and energy investors. While they use data to drive their theory the truth is that, "if you torture the data long enough it will confess" to anything, even a rock-bottom oil price.
It works on the upside too!
It probably comes as no surprise that those same models work on the upside of the price of oil too. Analysts simply adjust the data in their model for a much more bullish market sentiment and we get headlines like this:
- Goldman's Murti Says Oil 'Likely' to Reach $150-$200
- Get Ready for $150 Oil
- OPEC Sees Oil Prices Exploding to $200 a Barrel
Those titles were from articles dating back to 2008, 2011, and the last one I wrote a few weeks ago. In the each case there is a compelling argument being made that oil was going to burst higher because the industry simply can't keep up with future demand. Oil producers were being forced to tap harder to reach spots and costs were skyrocketing. In order to make money on oil producers needed a higher oil price in order to fuel new investments.
However, these headlines all played on the fears as well as the greed of the market. What ended up happening is that before the first two predictions could come true the price of oil tanked as the high oil price that drove these predictions ended up producing an unforeseen glut of oil as producers over produced while the high oil price of that day forced consumers to cut back. No one saw that coming, which is why it makes it hard to believe the price predictions at the top or bottom of any oil market.
The oil market is on a never ending cycle of doom and gloom at the bottom and euphoria at the top. Analysts race out there with their raciest predictions in order to capture the headline of the day. However, at the end of the day most of these oil price predictions will be wrong because each is based on a bias that's either too gloomy or too euphoric. That shouldn't come as a surprise as oil analysts have a long history of wrongly predicting the future price of oil.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Citigroup Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.