Lessons from 2016: “Oil Price Will Fall to $16”

2016 is drawing to a close.

As the curtains come down, I thought it would be a good idea to have a series of articles looking back at the events of the year to draw lessons from them. This is the first in the series.

Note: Here’s the second article in the series, here’s the third, and here’s the fourth.

What oil can teach us

Early in the year, a major talking point in financial circles internationally was oil prices.

There was plenty of chatter on this front in Singapore at that time too, given the fact that we have around 50 oil & gas companies listed here, some of which are companies with billion-dollar market capitalisations, such as Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51).

At the end of 2015, crude oil prices fell below US$40 per barrel, triggering all sorts of predictions on where prices of the fuel will end up in 2016.

In January, analysts from the Royal Bank of Scotland (RBS) claimed that technical signals they were seeing were pointing towards a low of US$16 per barrel for brent crude oil. Elsewhere, US-based financial services provider Morgan Stanley was in the same camp, predicting that oil prices could fall to as low as US$20 per barrel.

But the thing is, none of the predictions above turned out to be right. With less than a month to go for 2016, crude brent prices are trading above US$54. And oil prices did not even reach anywhere near US$20.

Predictions sounded rational at the time

When the oil price predictions were shared earlier this year, they sounded reasonable.

After all, oil prices had descended from a high of over US$110 per barrel in mid-2014 to under US$40 per barrel at the end of 2015. Oil prices had fallen hard and it probably “felt right” that oil prices would continue on their downward trajectory.

But this is why it can be dangerous to make predictions. In his book Your Money and Your Brain, financial journalist Jason Zweig explained the pitfalls of making predictions:

“First, they assume that whatever has been happening is the only thing that could have happened. Second, they rely too heavily on the short-term past to forecast the long-term future.”

It seems to me that this is what exactly happened with the oil price predictions made earlier this year. The predictions made were in-line with downward trends seen in 2015. Ultimately, they turned out to be wrong.

Therein lies a lesson for investors for 2016: do not heed all predictions.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.