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Forecasting oil prices is inevitably a fraught endeavor; in fact, it makes forecasting currency markets look easy. When I completed a doctorate on oil markets in the late 1970s and early 1980s, I had already concluded that trying to guess oil prices is a waste of time and energy. While interviewing me, Sedgwick raised an interesting point: Given that the volatility of many other asset prices has declined sharply in recent years, it might just be a matter of time before oil and other commodity prices do the same. Accordingly, oil markets are adjusting to stronger demand.Not surprisingly, market participants suddenly want to add a premium to the price of oil.I have long defaulted to watching the five-year forward price for lack of a more fundamentals-based approach to thinking about the equilibrium price of oil.The chart I prepared, which was made before the latest oil-price acceleration in early November, shows the five-year forward oil price picking up after a period of some stability. Sedgwick also asked me how oil companies might be able to make their investment and operational decision-making less beholden to cyclical factors.Is it possible for oil companies to temper their excitement during periods of rising prices, and not to fall into a malaise when prices are low for lengthy periods?
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