The oil market has a forecasting problem
Predicting oil production growth is a perilous task at best. Surging US oil output isn’t helping
Back in November, when Opec's ministers sat down in Vienna to assess the market and plot their strategy to rebalance supply and demand, their data brought good news. Non-Opec supply in 2018 would rise by just 870,000 barrels a day, said the monthly oil-market report from the group's secretariat, but global consumption would increase by 1.53m b/d. Demand for Opec's own oil would reach 33.4m b/d in 2018—almost 800,000 b/d more than the group was producing. Another heave on the cuts would clear the stock overhang and bring supply and demand into balance.
Three months of surging tight oil output later and the outlook, for Opec and the market, has changed. So, once again, have the data—and the revisions have not been small. Non-Opec supply this year will now rise by 1.4m b/d, said the secretariat's February report. A 530,000-b/d hole has been blown in the balances Opec was using in November.
Opec has been here before—the group has frequently miscalculated future supply growth from other producers, forcing it to revise forecasts (see graphic). But it isn't the only forecaster struggling to master data that change so quickly. The International Energy Agency's November forecast for non-Opec supply in 2018 was 300,000 b/d beneath the 1.7m b/d it now expects. The US Energy Information Administration (EIA) said in November that American output would average 9.9m b/d in 2018. Now the number has jumped a colossal 700,000 b/d, to 10.6m b/d. It thinks non-Opec supply this year will rise by 2.35m b/d. In November it said 1.52m.
Beating up on the forecasters is unfair. The market expects numbers from them, and serious people do calculations based on the data they have at the time. Absolute precision is impossible in an imperfect market. No one except the most ardent tight oil boosters expected the US to add 1.23m b/d of supply in just three months (September, October and November). And Opec's market report, in particular, has a wealth of macroeconomic data and analysis that deserves the credit it gets.
And if the supply-side of the ledger is prone to fluctuations, the demand outlooks are often unreliable too. Compare, for example, the forecasts made each December from 2013 to 2016 from the three main agencies for the following year's demand. Misses, sometimes major—and always underestimations—each time. Consumers, like Texan drillers, are hard to predict.
For 2018, the range of demand-growth predictions is startling. The IEA's rather bearish outlook is for demand growth of 1.4m b/d. Opec in February revised up its number, to 1.59m b/d. The EIA has 1.8m. Pira, a forecaster owned by Platts, expects growth of 2m b/d.
How does anyone in the market plan ahead when the experts diverge so widely? Use Pira's demand forecast and Opec's non-Opec supply outlook, for example, and you get a significant global supply deficit in 2018. Deploy the IEA's demand forecast and the EIA's non-Opec prediction and a huge supply glut is on the way.
Confirmation bias, an enemy of analysis, has us gravitate to the numbers we prefer. Where you live might have an effect too. If you're noticing all the electric vehicles cruising silently around London—or just bought one yourself—it's hard to believe in rampant global oil-demand growth. If you're reading this in a traffic jam in Guangdong or just splashed out on a Dodge Ram 3500 you have a different picture.
The mixed messages are important. As the November example shows, producers have to make policy now based on numbers that can obsolete within just a few months. Marginal supply, in particular, is reacting to price so quickly that the forward-looking models can't keep up. Planning based on forecasts is beginning to look like a crapshoot. Forget geopolitics, the oil market's data alone—and the many revisions they will undergo—are enough to breed volatility this year.
Source: Petroleum Economist, IEA