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End in sight to oil’s rout: Jim O’Neill

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Oil has been dealt a massive blow in recent months, but Jim O'Neill, former chairman of Goldman Sachs Asset Management, predicts prices will end higher this year.

Brent oil, which started the year at $58 per barrel, fell below $50 on Wednesday for the first time since May 2009. The international benchmark traded around the $51.40 level on Thursday. Meanwhile, the U.S. benchmark, West Texas Intermediate (WTI), began the year at $55 per barrel and last traded around $49.20.

O'Neill's projection of higher oil prices by year-end is based on the five-year forward price of oil, or the amount paid for guaranteed delivery of oil five years from now.

"In my ongoing quest to become better at forecasting, I began, a few years ago, to pay attention to the five-year forward oil price as it compares to the Brent crude oil spot price, the price of a barrel of oil today," O'Neill, famous for coining the acronym BRIC (Brazil, Russia, India, and China), wrote in a post on Project Syndicate's website on Wednesday. He is currently a visiting research fellow at Brussels-based economic think tank Bruegel.

The futures market is pricing Brent oil for delivery in January 2020 at $73.81, according to CME Group, around $20 above the spot price.

"I suspect that the five-year forward price is much less influenced by speculation in the oil market than the spot price, and more representative of true commercial needs," he said. "So when the five-year price starts moving in a different direction than the spot price, I take notice."

Read More Why oil will go even lower

Oil prices collapsed over 50 percent in the past six months amid feeble global demand compounded by strong supply growth. Analysts expect prices will fall further from current levels due to a variety of supply factors including increased oil exports out of the U.S. and record production levels from Iraq and Russia.

Lessons from history

Comparing the five-year forward price of oil to spot prices has proved an accurate forecasting tool for O'Neill in the past.

O'Neill cites the period following the global financial crisis as an example. In 2011, when oil prices recovered from a crash induced by the 2008 credit crisis, the five-year price started to fall, while the spot price continued to surge for a while.

"This jibed with what I had identified as two big factors fundamentally driving the price of oil: the early days of the exploitation of shale oil and gas in the United States, and the shift in China's economic focus from quantity to quality, which implied that the Chinese economy would no longer be consuming energy at the frenetic rate it had been," he said.

"I concluded that there was a fair chance that oil prices were peaking and that before too long spot prices would reverse and start to decline. I thought it was probably the beginning of a move back down to $80 per barrel – precisely where the price has landed at the end of 2014. It was one of my better forecasts."