Forecasting Deep Dive | A Look at Predicting Market Outcomes
February 6, 2018
The Breakthrough Applied Knowledge team is committed to providing the most comprehensive market information and forecasting data for our clients. We understand the value in being ahead of changes in the market and understanding market dynamics for the sake of budgeting efficiency. Let’s take a dive into our forecasting process, shedding light on the value and validity it can bring to your supply chain.
What commodity prices do the Breakthrough Applied Knowledge team forecast?
Breakthrough's Applied Knowledge team publishes monthly forecasts for wholesale truck diesel, wholesale rail diesel, Department of Energy Index (DOE Index) prices, and retail less VAT prices for Mexico and the European Union. These forecasts are updated and published in our client-exclusive Advisor publication each month, and forecasts are always created to include the remainder of the current year and the entirety of the following year, from the date of publication. In addition to these monthly updates, we take the opportunity twice a year—in January and July—to complete a comprehensive refresh of our forecasts. This blank-slate approach requires us to challenge our underlying assumptions, and to create the most robust manifestation of our market outlook. We find it is important to ensure that inertia does not drive our perspective in making predictions and that our forecasts are as sensitive as the market allows.
Beyond our usual forecasts seen every month, the Applied Knowledge team episodically forecasts prices for Canada, and will begin integrating these forecasts on a consistent basis in April of 2018. Historically, Breakthrough has also executed on-demand forecasting for a host of other countries including Brazil, Argentina, Russia, South Africa, India, Turkey, China, Indonesia, Australia, Thailand, and the Philippines.
What concepts are included in your forecasting model?
Our forecasting practice consists of three essential components: global petroleum market fundamentals, a global economic outlook, and an assessment of geopolitics and global risk. This first component, focusing on market fundamentals, requires an examination of the current state of global oil production and demand, as well as the current state of refining for the entire slate of refined products. Furthermore, the examination of fundamentals must include expectations about changes that may take place in the future, if – for instance – a regulatory change or a shift in underlying economics is expected.
Next, we look at the effect of geopolitics and the risk environment. Essentially, what we are doing here is understanding the risk that exists against the current picture of market fundamentals. Are any major producers facing regime change? Is terrorist activity going to curtail oil production? Are changes in the regulatory environment creating a price premium or subsidy? What impact is extreme weather likely to have? These are the types of questions we consider in assessing the risk environment.
Finally, we look at the overall economic outlook. On the simplest basis, an understanding of the direction of the economy can help us understand what is likely to happen to demand for fuel in the future, as economic growth and fuel demand growth are historically linked. Yet, understanding a broader picture of the economy is crucial as well. For instance, measures such as the value of the US dollar have a direct impact on the price of fuel in each local market, insofar as all fuel and oil is traded in US dollars around the world.
How do you construct your forecasted numbers?
Our forecast is unique in that it is not made by a model or automated tool. We holistically look at a number of data points that we know to affect price shifts in the marketplace, and then analyze how price dynamics are expected to shift as a result. The Breakthrough Applied Knowledge forecast considers years of historical data to help identify seasonality and market cycles, along with other underlying trends. Then, we incorporate expectations surrounding weather, future market events—such as OPEC meetings and production caps—and refinery operations throughout the year. It’s both art and science.
How does this bring value to our clients?
We are the only people, that we know of, who forecast the market price point for which Fuel Recovery clients will pay for fuel, which is the prevailing price at which carriers procure fuel . This information is ultimately a valuable input into shippers’ budgeting process. Effectively generating reliable forecasting data allows clients to project costs for the next 1-2 years. Having visibility into actual costs in real-time is extremely important, but being able to anticipate changes in fuel price behavior helps savvy shippers prepare for budgeting deviations.
Is it accurate/reliable?
We don’t require our clients to use our forecasts, and we don’t even necessarily ask them to. What we do know, is that clients trust the market insights we bring to the table and that historically we have had great success and accuracy in our published forecasts. In 2017 we had over 98.0% accuracy for both wholesale and retail forecasts.
We also do our due diligence to clients by providing other organizations’ forecasting data for retail prices, so that clients understand that there are other opinions to consider. We take great care to use evidence as commentary on why we feel the way we do about the numbers, but ultimately, we are one opinion among many.
The aforementioned forecasting data is exclusive to Breakthrough clients. For more information about Breakthrough services, our Applied Knowledge team, or questions about becoming a client, contact us!