Oil price forecasting using probabilistic projection of the United States dollar
Noll MoriartyArchimedes Financial Planning
The APPEA Journal 51(1) 411-422 https://doi.org/10.1071/AJ10026
Published: 2011
Abstract
Accurate forecasts for medium-term commodity prices are essential for resource companies committing to large capital expenditures. The inaccuracy of conventional forecasting methods is well known because they tend to be extrapolations of the current price trend. The inevitable reversal catches many by surprise.
This paper demonstrates that medium-term (2–5 years) commodity prices are not strongly linked to economic health and commodity demand-supply, but are instead inversely controlled by supply-demand for the United States dollar (USD) and consequent valuation. P90, P50 and P10 projection bounds for future valuation of the USD are presented based on the successful probabilistic techniques of the petroleum exploration industry.
This allows probabilistic projections for the oil price, which is inversely related to the USD valuation. I show that the USD is significantly undervalued at present. Probabilistic projection of the USD valuation indicates that likely appreciation will put downward pressure on commodity prices for the next 2–5 years. If the USD premise is correct, likely appreciation of the dollar during the next 2–5 years will hold stable, or even decrease, oil price to around USD $50 BBL. This is a contrary expectation to most forecasts—one which, if it eventuates, should give cause for reflection before committing to large capital expenditures.
Further investigation could examine the extent to which the USD valuation can be modelled as a fractal phenomenon. If so, it would mean the USD valuation is not driven by conventional economic fundamentals; instead, it is a semi-random number series with serial correlation. If true, probabilistic forecasts of the USD can be significantly improved, hence that of medium-term commodity prices.
Noll Moriarty is the owner of Archimedes Financial Planning, a company providing personalised financial planning for resources industry personnel who seek a quantitative and scientific approach. He graduated from Adelaide University with Honours in geophysics in 1973. He then spent eight years as a high school teacher before joining Delhi Petroleum in 1982, where he was employed as a field geophysicist and seismic interpreter until 1990. During 1984–87, he completed a Masters of Science (Hons) from Macquarie University to update his geophysical knowledge. During 1990–99, Noll was employed by Oil Company of Australia (later Origin Energy) as a senior geophysicist and exploration manager, attending to permits in the Eromanga, Cooper and Otway Basins. After redundancy in 1999, Noll completed a Diploma of Financial Planning from Deakin University and is now an authorised representative of Professional Investment Services Pty Ltd. He founded Archimedes Financial Planning in 2000: a company that specialises in applying the proven petroleum industry risk management techniques to personal financial planning for discerning clients located throughout Australia and overseas. Noll.Moriarty@ArchimedesFinancial.com.au |
