This is what we affectionately call the "Ernmor Trap", named after Ernie Hobbs, who used to hang around here quite a bit. Basically, it's a big wedge and the pop over the top is frequently a big fake out.
At this point, if we take a look at the Japanese candlestick chart of the same, you can see with less than a week to go in this month, we have a big harami spike pattern here, so maybe this is it for oil on the upside for a long while.
One of the reasons to think this is due to stories such as the following. I just went to visit the home page of Futures Magazine where I found:
New Volatile Plateau Supports Energies
[PDF]The “freedom” of Iraq hasn’t done much to increase the world’s oil supply, as some hoped going into the war, and the supply situation remains as tight as ever. At the same time, global economic recovery seems to be coming along slowly, lifting demand.Will $30 plus per barrel crude oil remain a way of life?
You know, it wasn't that long again that oil slipped under $10 a barrel. At the time, everyone was sure that it was going to go to $5. I don't have it handy right now, but there was a priceless Futures Magazine cover from the time that I will have to dig up, but in lieu of that, we have something from The Economist instead. The cover from the March 6, 1999 issue, was titled Downing in Oil [PDF], and here is an excerpt from the issue:
The supply situation is even gloomier for producers. Unlike 1986, oil supplies have been low to respond to the past year's fall. Even at $10 a barrel, it can be worth continuing with projects that already have huge sunk costs. Rapid technological advances have pushed the cost of finding, developing and producing crude oil outside the Middle East down from over $25 a barrel (in today's prices) in the 1980s to around $10 now. Privatisation and deregulation in such places as Argentina, Malaysia and Venezuela have transformed moribund state-owned oil firms. According to Douglas Terreson of Morgan Stanley Dean Witter, an investment bank, this has "unleashed a dozen new Texacos during the 1990s", all of them keen to pump oil.
Meanwhile OPEC, which masterminded the supply cuts that pushed prices up in the 1970s and 1980s, is in complete disarray. The cartel will try yet again to agree upon production cuts at its next meeting, on March 23rd, but, partly thanks to its members' cheating on quotas, the impact of any such cuts will be small. OPEC members fear that Iraq, whose UN-constrained output rose by 1m barrels a day in 1998, may some day be able to raise production further. Last week Algeria's energy minister declared, with only slight exaggeration, that prices might conceivably tumble "to $2 or $3 a barrel."
Nor is there much chance of prices rebounding. If they started to, Venezuela, which breaks even at $7 a barrel, would expand production; at $10, the Gulf of Mexico would join in; at $11, the North Sea, and so on (see map). This will limit any price increase in the unlikely event that OPEC rises from the dead. Even in the North Sea, the bare- bottom operating costs have fallen to $4 a barrel. For the lifetime of such fields firms will continue to crank out oil, even though they are not recouping the sunk costs of exploration and financing. And basket-cases such as Russia and Nigeria are so hopelessly dependent on oil that they may go on producing for some time whatever the price.
And $5?
All this explains why oil prices will remain low. But there needs to be a shift in the policy of the world's biggest producer, Saudi Arabia, for them to be halved again. The kingdom has for years restrained output to support prices. However, if its rulers think prices are going to remain low anyway, their calculation may change."If it weren't for politics," insists Euan Baird, head of Schlumberger, the world's biggest oil-services firm, "every barrel of oil would be pumped out of the Gulf-especially Saudi Arabia." Politics is not dead yet, as troubles in so many oil countries, from Venezuela to Russia to Nigeria have made plain-indeed, it may be the very prize of oil that has created these countries' problems. But a new kind of politics may now be at work to make Mr. Baird's assertion come true.
We'll see shortly if this was another full circle in the sentiment cycle. To its credit, The Economist admitted the goof in December 1999:
GOOFS: We woz wrong
Dec 16th 1999
From The Economist print editionNewspapers are quick to crow about their predictive triumphs. But what about when they are wrong? The editor of The Economist owns up to our recent, er, disappointments and explains why forecasts are so often wrong
A MESSAGE was sent to all our writers, offering a bribe (a bottle of good wine) for every admission of a forecast gone wrong that ended up being used in this article. Amazingly (that’s British irony, see article), the editor’s wine cellar has not been much depleted as a result. A remarkable number of the non-confessors—the biggest category of replies—defended our apparent errors by quoting John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?” Some even got the quote right, unlike Charlemagne in our issue of October 17th 1998.
Actually, that is an exaggeration. Nobody needed to own up to either of the two forecasts that most readers will remember as having been wrong this year—about oil prices and the bursting of America’s stockmarket bubble—because they were obvious for all to see. (Though, as this article will argue, only one of them was an error.) Still, the exercise did reveal a general reticence that goes beyond simple self-defence in the face of the boss. Part of the explanation is the weekly cycle: such is the urgency to move to the next issue once one has been printed, that writers tend to forget their previous prognostications, often conveniently. But also there is a real dispute—hidden in that quote from Keynes—about what counts as a bad forecast.
Such bloopers rarely—thank goodness—come clearer or more spectacular than our cover, “Drowning in oil”, on March 6th, which speculated that having fallen to $10 a barrel, the price of oil might soon fall further, even as far as $5. This view was surrounded by weasel words—possibly, perhaps, may—but no matter, for our leaning was clear. The world was already awash in oil. And the country with the biggest oil reserves, Saudi Arabia, looked as if it might react to this not by cutting output in a concerted effort by OPEC members, as in the past, but rather by “throwing open the taps” in an effort to boost its own oil revenues.
It wasn’t long before this was proved wrong. About four days, in fact: the following week, OPEC ministers agreed to cut their production, in a deal that was formally confirmed a fortnight later. By then, the price had risen by 30%. By December, it had hit $25 and was therefore getting close to having trebled since our forecast that the price might soon halve.
How could we get something so wrong? Aren’t Economist journalists supposed to be well informed and, dare one say it, clever? Well yes, and we certainly wish we had got it right. But it may at least be helpful to slice up the background to this prediction, to understand the peril that surrounds all such forecasts as well as to see why they are nevertheless worth making.
The first point to bear in mind is that forecasts of this sort are not made in isolation. The view that oil prices might continue to fall reflected a more general view about the world economy, and hence about the likely demand for oil. We felt queasy about American stockmarket values, and thought in any case that American economic growth was likelier to slow down than to accelerate. It hasn’t slowed, to widespread—but not universal—surprise. That fact, combined with rapid recovery in some East Asian economies, has enabled OPEC to keep prices rising and has limited the temptation for members to cheat on their output quotas. So be it, but the point remains that the oil-price error really reflected a wider misjudgment.
A second, narrower, point concerns Saudi Arabia. It is not a country about which it is possible to be well informed. Journalists, by and large, are kept out. “No publicity is good publicity” is the Saudi principle. Decisions are made in secret, with no public debate. So guesswork about what the Saudi government might want to do, concerning OPEC or anything else, is just that: guesswork. And it is not even guesswork about a clear national interest, but rather about the views and interests of a closed ruling elite. Why, then, even guess what these secretive sheikhs might do? Because it will affect what others—firms, people, governments—do.
Finally comes a point common to many forecasts, especially those that relate to or depend on the behaviour of a fairly small group of people. This is that a forecast can often be self-negating. By showing clearly where current trends are leading, it helps to galvanise minds into altering that direction. This is not to claim that our cover on March 6th singlehandedly persuaded oil ministers that they were heading towards disaster, and that they had better cut output, double-quick. Rather, the point is that it was part of, and contributed to, a general climate of concern about the over-supply of oil and the downward drift of prices. And that is what galvanised ministers into action.
Indeed, the giveaway words in many doomed predictions are “on present trends”, since trends often contain the seeds of their own destruction. Our error lay in not giving that possibility its due weight.
This is, of course, just one case, albeit an embarrassingly prominent one. For sure, there have been plenty of others. But we do at least get some things right, even if modesty prevents them being listed here. The trouble is, it is impossible to know in advance which are which. So wouldn’t it be better to give up making predictions altogether?
Predictions and policy
Let’s own up to a few more mistakes first, before explaining why we will carry on making forecasts. One that would be claimed in many NATO defence ministries is that we were wrong to criticise the American and European bombing of Serbia this year, as well as to suggest that it was unlikely to succeed. “Stumbling into war” were our cover words on March 27th, when we feared that the NATO effort could well fall flat, leaving the Balkans ablaze and the alliance weakened.It didn’t, they weren’t, and it wasn’t. The Serbs were indeed driven out of Kosovo. On the other hand, Slobodan Milosevic remains president of Serbia, and Russia has been bombing its own renegade province of Chechnya, partly on the grounds that if NATO can bomb things to smithereens, so can it. So were we right or wrong? Here is where the question of error blurs.
When we analyse a decision such as that of NATO to bomb Serbia, we are in reality trying to assess the risks and rewards of a piece of public policy, and in the case of a military action such as this the risks must be taken particularly seriously. Our view was that the risk of air power failing was high, and therefore it would be better for NATO to send in a proper force of ground troops as well. In the end President Milosevic capitulated, in a manner that surprised even the NATO commanders. But we would still argue that if preparations had been made to send in a ground force from the very beginning, Mr Milosevic might well have backed down sooner. The eventual outcome did not make our advocacy—with its implied predictions—unreasonable.
The same could be said of another president who remains in office, one William Jefferson Clinton. “Just go”, we said, and he didn’t. This, rather plainly (and, to some, objectionably) was advocacy rather than prediction, though it also contained a view that America would have been better off if he had resigned, during 1998 or even after his impeachment. Would it have been? There is no way to be sure, and President Clinton has arguably had a more vigorous 1999 than we might have expected. But his political capital is pretty negligible, there were broader (but even less provable) questions of the defence of the rule of law, and the recent debacle at the World Trade Organisation in Seattle might well have been avoided by a more confident, more legitimate president. In the “what-if?” game, there are no winners.
Perhaps, though, it would be as well to put politics aside and return to economics, which is supposed to be more predictable. East Asia’s financial crash of 1997 surprised many people, and so has its fast recovery this year. Would either have surprised readers of The Economist? We did, in fact, point out in advance that things were going wrong in the region, particularly with property booms and fragile banks. Indeed Chris Patten, the former governor of Hong Kong, wrote in his book “East and West” (Macmillan, 1998) that Asia’s troubles “had been both predictable and predicted, for example by The Economist.” (Thank you, Mr Patten.)
We also, in a survey of East Asia in March 1998, said that the region could recover quite quickly, if the right economic policies were to be followed. So far, so good. But what of our survey of Indonesia in July 1997 that said that, of the East Asian economies, this one looked to be reasonably healthy? Or of the warnings we gave, at several moments during 1997-99, that things could become much worse, particularly in China and Japan?
There are two defences, which it is hoped might be illuminating rather than actually defensive. One is that the thing that makes economic forecasting difficult, if not impossible, is the sheer complexity and variability of the relationships involved. What virtually everyone got wrong in East Asia, including us, was the way in which one country’s troubles fed on others’, and the way political instability blended with economic woes. (Conversely, misjudging the link between politics and economics probably explains why the Russian financial collapse we predicted on March 27th has not yet happened.)
The other defence returns to the earlier point about advocacy: to get the “right” economic policies followed you need to warn of the risks. But if the right policies are followed, the risks diminish.
Right because we are wrong
When you offer an opinion about public (or private or corporate) policy, you must also offer a view about the future: the possible consequences if the policy is followed, or if it isn’t. Indeed, the point is even broader than that. In every way that people, firms or governments act and plan, they are making implicit forecasts about the future. Many will prove to have been wrong. Still, one function a publication like The Economist can perform is to make such forecasts more explicit, to test or challenge them.Some may be right at the time, but the facts change. For example, scepticism about the boost to American productivity from information technology is gradually being counter-balanced by new facts; and as it has done so, we have changed our minds about this so-called “new economy” (though not yet completely). Other forecasts may be right but not yet. That remains our view of the “bubble” in the American stockmarket, on the basis of which we have for two years been urging the Federal Reserve to keep monetary policy tight. The Fed has been slow to do so, and in our view has thus taken a risk that today’s rising corporate and consumer debt levels may turn into tomorrow’s crash. We hope this proves to be wrong.
But might we be proved right? We cannot know. And that is the best point with which to leave this subject. For the irony is that getting things wrong actually reinforces one of The Economist’s main messages: namely, that free markets are better at determining outcomes than are brilliant people sitting in smart offices, be they central planners or journalists. Not that we get things wrong deliberately in order to prove this point, you understand. But if we were right all the time, communism might have worked. Then we would have been wrong about that too.
04.03.25 14:55 #