Here is a nice article by Bill Gilmer on the difficulty of forecasting energy prices.
“We have dug ourselves into a pretty deep hole. Futures prices are a poor predictor of spot prices, barely beating a random walk, but standard statistical models are even worse. Since futures markets are weak-form efficient, no financial model, statistical technique or subjective survey based on public data should do better.
Why are all the forecasts so poor? It is because the world will not stand still. All of the evaluations of crude futures markets assume that on a particular day the market takes past prices, inventory data and other fundamentals to produce a set of spot and futures prices. We write down the 12-month futures price, for example, then wait a year and check the spot market to see if the forecast was right.”
But what I really like about this article is that Gilmer quotes Professor William Tomek who coauthored (with the late, great Ken Robinson) the book, Agricultural Product Prices (http://www.amazon.com/dp/0801440939/?tag=mh0b-20&hvadid=3485020573&hvqmt=p&hvbmt=bp&hvdev=c&ref=pd_sl_3ed8ayq9xv_p)… The book and the course were the inspiration for me to enter the crazy world of commodity markets (many years go… ok, many, many years ago).. Here is Tomek as quoted by Gilmer:
““The preponderance of evidence suggests that markets are weak form efficient. Thus other publicly available forecasts cannot improve on futures quotes as forecasts. This does not mean, however, that futures quotes or other forecasts have a high degree of accuracy.”[1]
Me: Of course, we still want to hear the experts predict where prices will be next week, month, year… The EIA does make a statement around their price forecast which uses implied volatility to get at an expected price range going a few months out… In this week’s STEO release, for example, the EIA calculated a 95% confidence interval of $25 to $56 using April futures and options prices… So, in the current high vol market (with March implied volatility around 60%) the EIA is telling us not to expect their price forecast to be too accurate.. However, in the first half of 2014, implied vol was down to a record low of below 13%… Were price forecasts more accurate then?
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