Better shot at predicting oil prices

For the first time in its forecast, the Energy Information Administration, the main federal agency that analyzes energy markets and prices, is going well beyond such fundamentals as supply and demand and considering how energy trading and speculation might affect prices.

That makes the predictors’ job more complicated, but they hope it also more accurately reflects the volatility and uncertainty surrounding future oil prices.

By looking at trading in financial options for energy futures, the agency believes it can pick up volatility caused by how traders are reacting to events, which in turn can affect what is paid for oil. Considering the new source of information was evident in an EIA report released Tuesday that there continued to be significant uncertainty in the outlook for oil prices.

This looks like just the start of changes in how the EIA analyzes energy markets. The EIA recently said it was launching an energy and financial markets initiative. While traditional analysis of the fundamentals such as supply and demand would remain essential, other factors including speculation and investments in energy needed to be assessed, said Richard Newell, the agency's administrator.

It plans on producing reports and studies on the relationship of the fundamentals like oil stockpiles and other factors such as speculation and how they affect energy markets acknowledging that the impact of financial markets can't be ignored. "It's something that's here to stay," said Newell in an interview.