Oil: Big 3 forecasters are not reliable

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. However, according to Oil Price, 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.

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.

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.