The IEA is now much more bearish on 2018 than Opec
The latest forecasts from the IEA and Opec offer very different pictures of the oil market next year
Either the International Energy Agency or Opec will spend 2018 making lots of revisions to forecasts. For years, their broad view on the oil market has tended to chime. But a chasm has opened up between their outlooks for 2018. Both can't be right. The next 12 months will tell the market which is wrong.
Opec's latest monthly oil-market report, released on 13 December, is full of good news for the group's producers. Oil demand remains strong and will rise again next year by 1.5m barrels a day, it predicts. Non-Opec supply will grow too, but by just 1m b/d.
The upshot, according to Opec, is that demand for the group's own oil will rise by 300,000 b/d in 2018 to an average of 33.2m. In November, Opec produced 32.5m b/d, so the gap is big. Keeping it open is part of the plan, because the group wants to eradicate the surplus in the OECD's commercial stocks—the easiest way, it believes, to bring supply and demand into balance.
The overhang was more than 300m barrels earlier this year but had fallen to 137m barrels in October, according to Opec. Much progress—but work to be done. Opec acknowledges this, saying the market will now only achieve its balance at the end of 2018. That's what lay behind the decision to extend the cuts through to the end of the year.
But a methodological matter is increasingly problematic for this. Part of the decline in the surplus—a big part, worth about 80m barrels—has been achieved simply because the rolling average has itself been rising. The benchmark is getting easier to reach.
For example, compare October's surplus with the five-year average of the full years 2012-16 (just above 2.8bn barrels) and the excess remained more than 200m barrels. But add in the data available from the first two quarters of 2017, and move the start point up to the same quarters from 2013—in other words, adjust the inputs to account for more recent quarters of bumper output—and the absolute average rises to almost 2.9bn barrels. Hey presto, the excess has shrunk, because it is relative.
The other problem—not just for Opec but for anyone trading or investing in oil—is that the IEA's numbers now paint a much less certain outlook for the rebalancing. For a start, its monthly report, released on 14 December, expects 200,000 b/d less demand growth in 2018 than Opec's (1.3m b/d versus 1.5m b/d). It also expects much higher growth from non-Opec: an increase next year of 1.6m b/d compared with Opec's forecast of 1m b/d.
This discrepancy is large and it causes a big difference between the two forecasters' view of demand for Opec's crude. The IEA thinks this will average 32.5m b/d in 2018. Not only is this about 0.7m b/d below Opec's own forecast, but it's also only about 22,000 b/d above the group's own production number for November. If its output rises by 1% in 2018, Opec will be producing more than the market wants.
As for the draining down of stocks, the IEA implies they'll remain stubbornly high next year (even if the ever-rolling five-year average masks this). The agency expects stocks to build by 200,000 b/d for the first half of 2018 and then draw by the same amount in the second half. In absolute terms, the OECD's commercial inventory level will therefore remain flat. Despite the recent price strength, 2018 "might not be quite so happy for Opec producers", says the IEA.
The two outlooks may both be wrong—the IEA and Opec habitually revise their numbers later. Both forecasts also presume Opec and Russia will remain as compliant with the cuts as they were in 2017. And this is speculative.
If the market is as needful of Opec's oil next year as Opec expects, it will be unusual if producers don't start leaking more oil to meet the demand—especially if Venezuelan output drops more steeply than forecast, leaving an even more enticing gap to fill. On the other hand, if prices soften in line with the IEA's more bearish outlook or in reaction to a tight oil onslaught, the cutters that only reluctantly agreed to extend the deal (including Russia) will have a different reason to start backing out. The possible June break-point may even start to look too distant.
The market will know soon enough which forecast is on the money. In the meantime, every few cents of extra price strength—whether because of the Forties outage or more jawboning from Opec—gives tight oil producers the opportunity to hedge their bets. Already, notes the IEA, Permian and Bakken producers have sold 72% and 69%, respectively, of their 2018 output.