Grading My 2015 Energy Predictions
“It’s tough to make predictions, especially about the future.”
― Yogi Berra
I haven’t looked forward to this post since about mid-year, when it became clear that I wasn’t going to have a repeat of 2014’s perfect record. I recall a year ago wondering whether I would ever have a year the exact opposite of 2014 where I would end up with none of my predictions coming true. While I did a little better than that, there is no question that 2015 defied my expectations on many fronts. I did indicate at the time that rising uncertainty in the markets defied easy prediction. That certainly turned out to be true.
The funny thing about predictions is that things are always so obvious in hindsight. I rarely have people suggest that any of my predictions are either “no-brainers” or “impossible” when I make them. But when it’s time to grade them, I hear that a lot. “You predicted lower oil prices last year. Of course oil prices were bound to fall.” Those are the sorts of comments that tend to be made following six months of oil price collapse hindsight.
The hardest predictions to get right are those that require a certain condition to be true all year long. A lot can happen in a year. Oil prices have skyrocketed and plummeted in the course of a year. One of my predictions was in that category. It was correct for most of the year, but enough eventually happened to prove it false. It was clear to me after about six months that conditions were starting to tilt in that direction, but I don’t make predictions in six-month increments.
So, with that lead in, here is a rundown of how my predictions for the year fared, as well as an explanation in some cases for why things ended up differently than I thought they would. My predictions were initially made in Crystal Ball Shows Better 2015. Here they are, the good, the bad, and the ugly — in the order I made them.
1. The closing price of West Texas Intermediate (WTI) crude will not fall below $40/bbl in 2015.
This was the one that had the potential to be the first to not pan out. When I made the prediction, oil prices were already in the $40s and dropping fast. This prediction could have proven false within a month of me making it.
Before the end of January, the closing price of WTI fell to $44.12, but then bounced off of that level back to the $50s. The price climbed into the $60s by May, and remained there for nearly two months. But then OPEC met again and decided to continue to overproduce its quotas. Crude oil inventories had come down some, but I became concerned for the first time that the continued overproduction could drop the price well below production cost.
So prices began to fall again, and in late August WTI finally closed below $40/bbl for three straight sessions, proving me wrong. At that point, the price bounced off a low of $38.22 and climbed back into the upper $40s. So even though the prediction was proven wrong, $40/bbl still looked like a pretty solid price floor. But then another OPEC meeting maintaining the overproduction took place in December, and WTI broke back below $40/bbl. This time was different than August, as the price would not only remain below $40, but drop into the lower $30s.
If we were grading on a pass/fail system, it is clearly a fail. If you are grading on a curve, then as of August the prediction still provided useful guidance on a $40 floor for oil, but by December what I would have considered a “B” in August had become a “D.” Had prices fallen into the $20s (as many predicted and continue to predict), I would have given myself an “F” on this one. Speaking of “Fs”…
2. West Texas Intermediate (WTI) will average more than $60/bbl on a daily closing basis.
Through Dec. 21, the average closing price of WTI for the year has been $48.99. That is 18% below the average price I predicted. Further, the current price is $38.10, so the average will continue to drift down over the rest of the year. This was a clear miss.
3. The average Henry Hub spot price for natural gas will be below $3.50/MMBtu in 2015.
Here is one that I did get right, and one that looks obvious in hindsight. I did identify it as the prediction in which I had the most confidence. The average closing Henry Hub price for natural gas in 2014 was $4.37 per million British thermal units (MMBtu). It would have been a bigger “no-brainer” to simply predict that 2015 prices would be lower, so I got a bit more aggressive with this prediction. Not aggressive enough, perhaps, as year-to-date the average closing price has been $2.64/MMBtu. A much bolder prediction — and one I briefly considered before concluding that it was too risky — was the price would fall below $2.00/MMBtu. That in fact happened briefly in October, and then again earlier this month, when the price fell well below that mark all the way to $1.66/MMBtu.
The collapse in natural gas prices, just as the oil price collapse, is partly the result of the surge in U.S. shale output. But, in contrast to the global market for crude, U.S. natural prices still mostly reflect domestic supply and demand factors. The shale boom, combined with a couple of mild winters and summers, has resulted in the highest natural gas inventories on record. The long-term outlook for natural gas producers is still good, but the short term looks like it will continue to be painful.
4. U.S. crude oil production growth will probably slow, but will still expand for the seventh straight year.
This was another correct prediction, on both counts. U.S. crude oil production did slow, but did expand for the seventh straight year. In 2014, production averaged 8.7 million bpd, an increase of 1.2 million bpd over 2013 (which represented an increase of 1 million bpd over 2012.) This year through September, U.S. production has averaged 9.4 million bpd — an increase of 700,000 bpd over 2014. However, current production is below 9.2 million bpd after peaking at 9.6 million bpd in April. The average production numbers for 2015 won’t be finalized until early 2016, but based on the average through September and the current numbers the 2015 average should come in at 9.3 or 9.4 million bpd.
5. The Energy Select Sector SPDR ETF (XLE) will rise at least 10% in 2015.
I consider this to be my worst miss. It was driven by both the collapse in oil prices and the collapse in natural gas prices. The problem with some of my predictions was they were interrelated. Failure of one led to failure of others.
In this case, the XLE has a total return through Dec. 24 of -22.2%, and is now down nearly 30% over the past two years. Historically, such a sharp decline leads to a rebound, but given the difficult intermediate outlook for oil and gas prices, an extended rally may still be months away.
6. BP will be bought out or merged in 2015.
I called this “my most aggressive, wild card prediction for 2015.” Speculating on a deal within a year was what made it the riskiest.
I made this prediction primarily to call attention to how grossly undervalued BP (NYE: BP) was relative to all of the other supermajors. This was true even if one assumed the worst case financial outcomes for BP related to the Deepwater Horizon oil spill in the Gulf of Mexico. I pointed out that there were only a handful of suitors that could pull this off, but that the value of BP’s reserves was compelling given the market value of the company. A company like Shell (NYSE: RDS-A) or ExxonMobil (NYSE: XOM) could find oil reserves on BP’s books at a much lower cost that of their own exploration efforts.
In fact, several sources reported that before Shell announced its $70 billion acquisition of BG Group (London: BG) earlier this year, it seriously considered bidding for BP. Bloomberg also reported that “BP executives are concerned the company is vulnerable to an opportunistic bid” — with ExxonMobil and Chevron mentioned as the most likely pursuers. BP reportedly stepped up internal reviews of takeover scenarios and simulations of defense strategies against a hostile takeover, but acknowledged it would have limited options if ExxonMobil came knocking.
In July BP agreed to pay $18.7 billion over 18 years to settle the federal and state claims and fines over the Gulf spill, pushing the total tab for the disaster to nearly $54 billion. In October the Obama administration said it had finalized the terms of the settlement, which would actually be $20.8 billion. This removes a major uncertainty for potential BP suitors, but there are still hurdles in place.
For the year, BP’s share price has outperformed Shell and Chevron. In fact, for much of the year it outperformed all of the other supermajors. And while it is still a compelling value in my view, BP will close 2015 without being acquired or merged. Hence, this prediction proved wrong, but I still expect a deal to happen at some point.
This was by far my worst annual predictions performance in a long time. I take little consolation from the fact that I had lots of company this year for missing the mark on the energy sector. I do believe the sector is largely oversold, and I expect better results in 2016. Next week I will outline my predictions for the coming year.