It’s no surprise that the topic du jour is the global oil market, sliding crude prices and the reaction -- or lack of it -- of Opec to a developing threat to the member countries’ finances.
Given the subject’s importance to the Gulf, and intriguing analytical content, it is in fact too hard to resist here this week, although the recent news itself is plain enough.
For the exporting nations of the region, a regrettable loss of revenue now accompanies a recalculation of what strategy to follow for best effect over time. Last week’s gathering of ministers in Vienna keeps that an open question, while Saudi Arabia’s answer, the most vital among decision makers, seems to be to watch and wait for now.
The keynote emerging from the Opec meeting seemed to be a diplomatic nod to ‘unity’, but concomitantly a pledge to ‘vigilance’, presumably in case the price plunge turns into the kind of rout that requires urgent remedial intervention.
One notable point about the background to these events is that the slump in oil prices from their elevated plateau wasn’t foreseen, despite the fact that the stuttering nature of global recovery has been apparent throughout, and US shale’s increasing presence has equally been known about for a considerable while.
Yet, that’s the usual way, in fact. Forecasters notoriously lean towards the numbers already prevailing to guide their prognoses, as there’s a natural and characteristic caution about veering too far from prevailing levels, and the accumulated body of relevant knowledge has, for an internationally-focused commodity, been processed thoroughly by both the specialist and general financial markets, removing any obvious bias to horizons.
Among professional analysts putting out research for the banks, for instance, there can be a natural reticence about straying far from the common line, fed by daily reporting in the media as much as anything else, just as fund managers tend to view their relevant benchmark as the position taken by their counterparts in the industry, rather than what the outcome in any watched variable actually turns out to be. Deviation from the norm might be a marketing tool for some, but for most offering their outlooks there is a certain safety in ‘safe’ numbers.
Such tendencies belong to the field of behavioural finance, which has come more to the fore in recent years upon the special impact of the global financial crisis. Perusing the investment reviews offered by wealth managers these days brings exposure to useful ideas in this realm for those who are concerned to protect themselves from market fallout, particularly now they know that diversification per se is no cure-all.
Thus, we discover that research has unearthed the issue of ‘anchoring’, namely the inclination to place more credence in established prices rather than latest information that might move the market. Or the ‘illusion of knowledge’, where pure information itself is less meaningful than genuine insight, in other words how news is interpreted.
Then there’s ‘confirmation bias’, reaffirming what is felt and believed rather than what might dislodge that thinking. Or a vulnerability to ‘priming’, whereby often-repeated notions become ingrained, whether insightful and helpful or not. All of which can lead to ‘hindsight bias’, which merely extrapolates recent experience into the future.
These are fascinating concepts for the true understanding of markets, and explain why expectations can deviate so much from what actually happens, even without some ‘black swan’ event that no-one identifies in advance.
So, what, if anything, should we make of oil forecasts, now or at any other time? Not much, probably. Consensus seems to say a downtrend will persist in the short term, with everyone tuned in to the same story, until longer-term demand and supply shifts alter the picture.
Until the tune changes, that is, for whatever reason. Just how much shale is shaken out of the system might well be the critical factor. Perhaps also political ructions, as governments, particularly outside Opec, undergo the stress test of much-diminished cash flows.
