1 / Analyst forecasting errors
It’s all about the vol
Not all commodities are equal when it comes to price forecasting. Figure 1 compares commodity volatility on the one hand with the average absolute analyst forecasting error for various commodities over the past decade. To calculate the forecasting error, we take the consensus forecast for each commodity at the start of the year and compare it with the final price outturn. The chart shows a clear positive correction: namely, the higher the volatility, the larger the analyst forecasting error for that commodity.
This work suggests that you can have a relatively high degree of confidence when it comes to the year ahead price forecast for gold and copper since price forecasts typically only diverge from the final outturn by no more than 10%. But when it comes to energy commodities, you need to take price forecasts with a heavy pinch of salt. Our analysis shows that commodities within the energy complex such as Brent crude oil and US natural gas have higher levels of volatility which are associated with large forecasting errors particularly compared to base and precious metals. A large part of this volatility divergence can be explained by the variation of consumption-to-inventory ratios across the commodity spectrum, which are typically lower for metals and higher for energy commodities.
When it comes to commodities within the energy complex, one commodity stands out, EU carbon prices. These have historically been the most challenging with an average absolute forecasting errors of 35%, or more than three times that of gold. Also noticeable is how the size of the forecasting errors over the past decade has been rising significantly and specifically from 2018 onwards as carbon prices have found a possible new and higher price plane.
Assuming the consensus price forecast for next year does not change between now and year end, and that the historical forecasting error between 2010 and 2021 persists into next year, it would imply an average 2023 EU carbon price forecast of €97/tonne (€71.6 x 1.35) or c.45% above the current spot price.
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