From Barron's Commodities Corner May 1, 2015:
Researchers claim they’ve found the best way to forecast prices at the pump. They say it points to higher fuel costs.
Bloomberg Commodity Index
For
many investors, a coin toss may seem like the most reliable way to
forecast U.S. gasoline prices. But researchers say they’ve developed a
system to tilt the odds.
Unfortunately,
their statistical technique indicates that gas prices are likely to
march steadily higher over the next 18 months.
The
academic researchers looked at prices that drivers pay at the pump and
found that a big part of the plunge in the second half of 2014 wasn’t as
surprising as some analysts thought. Up to 39% of the decline, to be
precise, was predictable as of June 2014, according to a January-dated
working paper released by the Frankfurt-based Center for Financial
Studies.
“The change in the gasoline price in the
past has been considered essentially unforecastable, based on publicly
available information,” states the paper, with the title “Inside the
Crystal Ball: New Approaches to Predicting the Gasoline Price at the
Pump” by Christiane Baumeister of the Bank of Canada, Lutz Kilian of the
University of Michigan, and Thomas K. Lee of the U.S. Energy
Information Administration. “Our findings challenge this conventional
wisdom,” says the paper, which is available at the University of
Michigan Website (
umich.edu) under Kilian’s papers.
Over
time, prices at the pump and futures prices tend to move in the same
direction. So, in theory at least, investors could use the same price
trends to trade.
ALTHOUGH THE RESEARCHERS
tested many forecasting methods, the most accurate single model for
predicting prices turned out to be the simplest, despite a forbidding
name for nonstatisticians. It uses a method called vector
autoregression, in this case with only two inputs: retail gas prices and
the benchmark Brent crude oil price, both adjusted for inflation. Very
basically, this method employs historical prices of the two commodities
to forecast their future prices.
Tested
against data back to 1992, the model produced statistically robust
forecast results that outperformed the coin toss out to 18 months. On
average, the individual forecasts were closer to actual outcomes than
other models, the report shows. Think of the forecasts as target
shooting with a rifle: Accuracy is important, but so is a tight grouping
of shots. In this case, the grouping of forecasts for gas prices was
tighter than other models.
The
researchers also found that the U.S. Energy Information Administration’s
own forecast, which it makes public, was directionally correct. The EIA
predicted the price of gasoline would average $3.31 a gallon last
December, down from $3.75 in May. The actual average was $2.54. The
major problem with the public forecast is that it only extends out 12
months. The researchers’ model has a longer timeline....
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