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Terence Corcoran: Oil and the art of forecasting

Sensational headlines and predictions do not shape the future. The market does

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One of the great entertainments in economic journalism is being able to observe the performances of professionals who peer into the future and tell us where the various parts of the global and national economies are heading.

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The hottest topic right now is the short-term outlook for the price of oil. We all want to know how much it will cost next week to fill our automobiles with gasoline, run energy plants, fuel factory production, and pay for air travel, shipping and essential services to keep the global economy moving. Oil topped US$100 a barrel this week and gasoline approached $1.60 a litre in parts of Canada, but where is the price going next?

It all depends on the global price of oil, and that outlook depends on which forecaster is on stage performing. The U.S. Energy Information Administration (EIA) bravely produced a report that implied forecasting was a piece of cake. In summary, the EIA forecast that oil prices would remain elevated above $95/barrel for the next two months due to Middle East supply disruptions. The average price in 2026 will decline to around $70/barrel by late 2026 as market pressures ease. “We expect prices to average $64 in 2027.”

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That’s one view. Another from Wood Mackenzie, a global consultancy, has (or had two days ago) other ideas. How much higher could Brent crude go? “Certainly over US$150/bbl in the coming weeks as it did in 2022 (in real terms), when Russia invaded Ukraine. However, supply volumes at risk this time are dimensionally bigger — and real. In our view, US$200/bbl is not outside the realms of possibility in 2026.”

Avoiding $200 is one of the reasons 32 nations are releasing 400 million barrels from global oil reserves to flood the market to offset the supply blockade in the Gulf of Hormuz. But forecasters are not convinced it will work. In fact, some claim the low volume of the release is actually keeping oil prices high. “There is no policy response that can stop the rise in oil prices — none,” said another forecaster.

With oil price headlines ranging from $80 a barrel to $200 for the balance of 2026, other members of the forecasting community must attempt to balance and apply predictions to the chain of economic activities that make up global and national economic activity.

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For Canada, a useful forecasting effort from Capital Economics steers clear of sensational outlooks with what appears to be a more reality-based summary assessment: “Higher oil prices are positive for the Canadian economy.”

The forecast sets out three scenarios: a severe but short-lived conflict, with oil prices quickly dropping back; a longer conflict but with limited damage to Gulf energy infrastructure, causing West Texas crude to rise to $125 for three months before falling to $85 by year-end; and a longer conflict with lasting damage to energy infrastructure, causing WTI to rise to $145 for six months and remain above $100 until the end of 2027.

In any case, Canada’s GDP growth will increase by up to 0.4 per cent in the $145 oil price scenario. Inflation will also rise up to 1.5 per cent above current levels. As for interest rates, ”unless prices rise significantly further and stay there for several months, we doubt the Bank of Canada would respond with rate hikes so soon before CUSMA renegotiations get underway in earnest.” Not surprisingly, the Canadian oil industry is expected to benefit.

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Such cool-headed forecasting is welcome amid the panicky reports of soaring gasoline prices and war turmoil in the Middle East. When it comes to oil, however, sensational predictions are the norm. Among the great examples from the past have been warnings of imminent peak oil. First falsely predicted in 1980, peak oil warnings continue to this day, with the International Energy Agency (IEA) predicting in 2024 that oil demand would peak in 2029.

However, as the graph below makes clear, there is zero chance of oil peaking any time soon, no matter what the price. The market drives the economy, not forecasts.

• Email: tcorcoran@postmedia.com

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