The oil market hinges and moves on forecasts. Whether it’s an oil demand growth forecast or a production forecast, no forecast is more closely watched and scrutinized than that provided by one of the big three: the IEA, EIA, and OPEC.
The problem is, these forecasts often vary wildly from one another, meaning at least one of these forecasts will be wrong.
Bloomberg’s Julian Lee this week wrote in a column about the discrepancy between OPEC’s oil demand estimates for 2020 and those of the EIA and the IEA, noting that while the oil producing cartel expected global oil inventories to keep declining this year, both the International Energy Agency and the EIA expected these to continue building.
Motive Behind the Forecasts?
One might argue that there is some wishful thinking on the part of OPEC, which really wants its production cuts to work and shrink global inventories to put a firm floor under oil prices.
Yet there is some wishful thinking on the part of the U.S. EIA, too, in light of the administration’s energy dominance agenda. The EIA has had to revise downwards its oil production estimates before, when actual production data has turned out to be lower than earlier forecasts based on statistical modeling.
It is a fact that U.S. production is growing, and OPEC acknowledges this grim reality. But it’s possible that US production might not be growing as much as forecasts show. Related: Iran Faces Threat Of Full Global Sanctions
That leaves the International Energy Agency. Does it, too, have a vested interest in one supply and demand forecast over another? Theoretically, it shouldn’t. The authority seems to be increasingly busy with warning against continued inaction with regard to climate change to take sides in the oil supply and demand prediction game. Also, a lot of the time, its figures converge with the EIA’s and/or OPEC’s.
Demand Growth and Supply
For this year both OPEC and the IEA see oil demand growth at some 1.2 million bpd. The EIA is in the middle, forecasting global oil and other liquid hydrocarbons demand this year to grow by 1.3 million bpd.
For non-OPEC supply, the IEA is actually less bullish than OPEC. It expects production outside the cartel to rise by some 2.1 million bpd, while OPEC itself sees this growth at 2.35 million bpd. The EIA has the highest non-OPEC supply growth forecast for this year, at 2.6 million bpd.
The Inventory Headache
The differences, according to Lee, however, are striking when it comes to the state of global oil inventories over the last three years, since the first production cut deal entered into effect at the beginning of 2017.
According to self-congratulatory OPEC, world oil inventories since 2017 have fallen by 653 million barrels. According to the EIA and the IEA, on the other hand, there has been no decline in the amount of global oil inventories. All the OPEC+ cuts have done, their numbers suggest, is to curb the size of the inventory builds in each of the three years since the cuts were introduced.
The EIA, in fact, has estimated that global oil inventories have risen by some 100 million barrels over the last three years. The IEA has an even higher number, at 142 million barrels. Related: Why The Coronavirus Is A Real Threat To Oil Markets
It appears the discrepancy comes from different methods of counting how much oil in storage there is in the world and the different things the IEA, the EIA, and OPEC actually count, according to Lee. Then there is the fact that not all oil inventories in the world are readily available for counting. Chinese oil in storage, for example, is notoriously secret as Beijing does not release public updates about it as the EIA does.
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So if there is no information about all the oil in the world, how much faith should one put in global inventory estimates, regardless of the authority making these estimates? Not too much would be a reasonable answer. The state of global inventories, after all, is just one piece of the puzzle.
Supply and demand growth forecasts, along with consumption and production trends, are much more important than inventories for gauging where oil prices will go next. These tend to change more often and all of them affect inventories. The level of inventories itself is the end result of supply, demand, production and consumption.
For those wondering if there is enough oil in the world in case a serious outage occurs, the answer is yes, with all three authorities in agreement. In the OECD alone there is enough oil to meet 60.6 days of demand. According to Bloomberg’s Lee, this is a much more sensible indicator of supply levels than the volume of oil inventories. It is certainly a more understandable one: these are inventories in the context of global demand. So regardless of how successful the OPEC+ deal is in the end, the world has no shortage of oil for now.
By Irina Slav for Oilprice.com
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To make an objective comparison between the three forecasters in terms of their forecasts of global production, supplies, reserves, oil discoveries, global consumption and prices, we have to look at the motivation behind their forecasts.
The raison d’etre of IEA is to ensure the availability of enough supplies for its members at low oil prices. So the IEA tends to exaggerate its forecasts for rises in global reserves, oil discoveries, oil production particularly from non-OPEC sources and supplies in the market and reduce its forecast for global consumption for the sole purpose of depressing oil prices for the benefit of its members. The IEA is notorious in its excessive hype about US shale oil potential and growth in its production. When the IEA talks about US oil production exceeding the combined production of Russia and Saudi Arabia in 2025 at 25 million barrels a day (mbd), such a forecast speaks volumes about its shallow research and its slavishness to the US Department of Energy.
The EIA is motivated by three major objectives. The first is to see the United States as the world’s largest crude oil producer. The second is to make the US self-sufficient in oil. And the third objective is to depress oil prices for the benefit of the US economy. Since it has failed to achieve the first two objectives, it has resorted to excessive hyping about the potential of shale oil and the significant rises in US oil production from year to year. The EIA has been claiming that US has become the world’s largest crude oil production, that the US has also become net exporter of crude and oil products and that US production in January hit 13.0 mbd except that these claims are not true. US oil production is overstated by a minimum of 2.0 mbd because of inclusion of gases such as ethane, propane, butane and pentanes which don’t qualify as crude oil and have never been sold as crude and also by a discrepancy of 600,000 barrels a day (b/d) to 1.0 mbd between its weekly and monthly reports. This means that US production in 2019 averaged only 10.0 mbd and not 12.2 as the EIA claimed. Moreover, US crude oil imports in 2019 averaged 8.8 mbd. Furthermore, the EIA has been manipulating oil prices by unsubstantiated claims about rises in US oil production and significant build in US inventories of crude and products.
OPEC’s motivation according to its constitution is to ensure enough supplies in the global oil market, stabilization of oil prices and also maximizing oil prices to the level that the global economy can tolerate so as to enhance oil revenues for its members. This is the raison d’etre of OPEC since its founding. However, OPEC as a forecaster has never exaggerated its members’ production or reserves. When OPEC, under pressure of declining oil prices in the early 1980s was forced to introduce production quotas for its members, it based the quotas on the size of proven reserves and production capacity of members. These two criteria gave members a license to raise their proven reserves in what became known as political reserves in order to secure bigger quotas.
Still, the integrity of OPEC forecasts has been and is still beyond any reproach.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London