Jim O’Neill is famous for coining the acronym BRICs while he was an economist at Goldman Sachs.
However, he actually wrote his Ph.D. thesis on OPEC and oil prices.
In Project Syndicate Wednesday, he writes that he thinks he knows where oil is going, despite thinking that trying to forecast the price of oil is a fool’s errand.
I used to joke that the most important thing I learned from my research was never to attempt to forecast the price of oil. As 2014 comes to a close, the price of oil has just crossed the $US100 threshold again — this time headed down. One of the big questions for 2015 is whether the decline will continue. Despite my earlier cynicism, I think I know the answer.
Turns out he thinks oil will be higher at the end of the year than it is now, though it will continue to fall in the short term.
His indicator? The spread between the five-year forward price and the spot price of crude.
According to the CME, the futures market is pricing Brent oil for January 2020 at $US75.03. Meanwhile, the spot or current price has been all over the place, crashing to as low as $US49.66 on Wednesday.
“I suspect that the five-year forward price is much less influenced by speculation in the oil market than the spot price, and more representative of true commercial needs. So when the five-year price starts moving in a different direction than the spot price, I take notice.”