Cathie Wood Got Oil Wrong. It Isn’t Going to $12. Here’s What She Missed.

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ARK Invest’s Cathie Wood admitted she didn’t get her oil price forecast correct. There is a lesson in the admission about commodity investing.

Wood predicted back in 2020 that oil prices were headed to $12 a barrel. She believed oil demand had peaked and that, with the world shifting to electric vehicles, falling oil demand would equal lower prices.

The original prediction came in a tweet in mid-July 2020. Oil was trading at about $40 a barrel then and was three months removed from trading at negative $37.63 a barrel. Don’t forget, in the early stages of the pandemic a quirk of futures contracts had traders paying real money to offload expiring contracts.

During the pandemic, oil demand plunged to about 83 million barrels a day from a pre-pandemic high of more than 100 million barrels a day. So far, so good for Wood’s prediction.

The rest of the story is already known. Oil demand recovered. So did oil prices.

Still, demand hasn’t reached prior peaks. The International Energy Agency has demand at about 98 million barrels a day. Maybe there is a case to be made for Wood’s view of peak oil demand.

Her view of prices looks tougher to justify.

Instead of falling, oil prices have soared. Benchmark crude oil prices ended 2020 at almost $50 a barrel, ended 2021 at about $75 a barrel and traded above $130 a barrel on Monday.

The thing about commodity prices is they can have floors that roughly correspond to the cost of marginal production. Every commodity is different, though.

All the gold ever mined, for instance, is essentially still in in circulation. Annual gold mine output only adds a tiny fraction to the total amount of available gold. The cost of gold production has less influence on gold prices than, say, the cost of oil production.

Oil, however, gets used up as it is produced. And when prices fall producers produce less. They don’t like to lose money on every barrel they pump.

U.S. crude oil production peaked at 389 million barrels produced in November 2019, according to U.S. Energy Information Administration. Production fell to 274 million barrels for the month of February 2021. That’s down almost 30%. Production for the month of December 2021 came in at 359 million barrels, still about 8% below the peak.

Wood said the supply shock is why she got oil prices wrong. It isn’t clear if the supply shock Wood was referring to was related to the Russia-Ukraine shock that has sent oil prices up recently. It really shouldn’t be a shock that production fell as prices tanked.

ARK didn’t immediately respond to a request for comment requesting clarification.

Even if oil goes into secular decline, prices should, very roughly, track the marginal cost of production. Where will that price be? That’s hard to say. It won’t be $12 a barrel, though. No one makes much money at those prices.

Every oil producer’s cost structure is a little different. Shale producers have different costs of production than producers drilling in deep water as well as different cost figures from producers mining Canadian oil sands. Saudi Arabia probably has the lowest cost of production, but Saudi oil revenue also supports government budgets. That makes calculating a Saudi break even a difficult prospect.

Oil prices in midday trading are up about 1.5% at roughly $117 a barrel. The

S&P 500
and

Dow Jones Industrial Average
are down about 2.3% and 2%, respectively.

Write to Al Root at allen.root@dowjones.com