Oil market projections could be too optimistic
IEA and Opec projections for strong demand growth in 2014 rest on assumptions for economic growth that could prove far too optimistic
The International Energy Agency (IEA) and Opec don’t always agree. But in their monthly oil-market reports issued this week they are singing from the same hymn sheet. The world economy is coming out of the trough, they believe, and oil demand next year will rise quickly.
If that sounds bullish, beware the details. The IEA’s outlook rests on IMF forecasts for the global economy that have already been downgraded. Both the agency and Opec also think non-Opec supply will rise more than demand next year. Neither of them has factored in the recent surge in oil prices, either. Both think Opec’s share of the market will slide still further. Things could get bumpy in the market in 2014.
The IEA says consumption will grow by 1.2 million b/d next year, to, 92m. Non-Opec supply, thinks the agency, will rise by 1.3m b/d. Opec sees demand rising by 1.04m b/d, to 90.68m in 2014. Non-Opec supply, it says, will increase by 1.1m b/d. North America will be mainly responsible for this production growth.
Despite the headline increase in global oil consumption, Opec should be concerned with these numbers. The call for its crude this year, at 29.9m b/d, is already 400,000 b/d beneath demand for the group’s oil last year. Next year, says the secretariat, it will fall again, to just 29.6m b/d. So much for the much-repeated notion that the shale-oil bonanza would not affect Opec’s market share. The IEA’s forecast is even worse, seeing the call this year at 29.6m b/d and falling again next year, to 29.4m b/d. Those are disturbing numbers: in 2008, the call was 32m b/d in a much smaller market. Opec’s share of supply has fallen by more than seven percentage points in the past five years, to around 32.6%.
Nor should anyone get carried away with next year’s demand outlook. Both forecasts are based on a recovery in the OECD economies and strong buying from developing nations. “The main underlying assumption is that of a recovery in the OECD,” says Opec in its market commentary. That’s quite an assumption, given the mixed bag of economic data that continues to flow out of the Eurozone and even the US, where the jobless rate jumped to its highest level in two months this week. News from China, where exports and imports both fell this week, is also bad.
The rest of Opec’s commentary is riddled with other macroeconomic threats that could shred its forecast. It leaves all the risk to its outlook on the downside. So if demand next year actually ends up where the cartel thinks it will, the world economy will have landed on its feet.
The IEA is even cagier. There are “many uncertainties” in its forecast, the agency acknowledges. Indeed, halfway down its market commentary is a major caveat: “This report’s projections have yet to take into account the latest downgrade in the IMF forecast of global economic growth, as it came too late in our data processing cycle.”
Given the importance of the IMF’s forecast’s to the IEA’s demand projections, that sentence is almost enough to render the demand outlook irrelevant. Earlier this week, the fund revised its outlook for growth this year and next down by a quarter of a percentage point for each year, to 3.1% in 2013 and 3.8% in 2014. Watch for an IEA revision to its numbers in August.
Meanwhile, thanks to heavier-than-expected draws in US stockpiles last week, the coup in Egypt (and the spectre of threats to the Suez canal), and unrest in Iraq and Libya (which helped lower Opec’s output in June by 380,000 b/d to 30.61m), oil prices have surged in recent days. On 11 July, Brent was trading around $108 a barrel and WTI, which has spectacularly narrowed the differential, around $105/b.
Neither Opec nor the IEA has had time to factor in what the added cost of fuel will do to economic growth prospects or demand. But it won’t help either. If the prices are sustained, we’ll know the impact towards the end of 2013. The market’s strength will buoy non-Opec producers, though. Next year is already looking pivotal for global oil markets.