Questions over reliability of IEA forecasts
Since the start of 2018, the Paris-based International Energy Agency (IEA) has constantly been putting forward pessimistic forecasts to halt rising oil prices. In 2017/early 2018 it concocted the bearish scenario of a surge in shale oil production that will neutralize OPEC/non-OPEC output cuts.
However, the IEA neglects to consider that global oil markets were rebalancing and continued to do so until the end of 2018 due to a substantial supply deficit. Moreover, now in the fourth quarter of 2018, IEA’s forecast proved to be wrong as OPEC-plus — OPEC plus Russia and former members of the Soviet Union such as Azerbaijan — balanced the market and last June producers agreed to ease output cuts. This remarkable flexibility in oil production has been led by Saudi Arabia to ensure that the energy the world needs is available.
Early this year the IEA predicted an unsatisfying outcome for OPEC/non-OPEC production cuts, although how that could be was unclear. OPEC and its partners have managed a historically high compliance rate on production targets. This has greatly rebalanced markets resulting in huge declines in oil inventories leaving them below the five-year average. The high compliance rate was mostly achieved even before the Venezuelan supply shortages took hold.
The IEA addressed 2018 challenges prematurely to orchestrate scenarios for growing US shale production. However, despite record levels of US output, oil exports plunged from 2 million barrels a day (bpd) to around one and a half million bpd, due to limited logistics and export infrastructure.
All the evidence shows that the IEA’s goal is to push down oil prices. Since the end of October 2017, slowly and steadily, oil prices have risen above the important psychological barrier of $60 per barrel. The IEA set out to reverse that movement by claiming that surging shale oil would flood the market, overwhelming output cuts from other producers.
In the fourth quarter of 2018, the IEA found the outlook and forecasts it had made earlier this year were incorrect. In its October 2018 Oil Market Report, the IEA cut forecasts for world oil demand growth for 2018 and 2019. Its October report reduced the requirement for OPEC crude and increased the scope for inventory builds.
All the evidence shows that the IEA’s goal is to push down oil prices.
This is a bizarre outcome. After all, in early October the IEA had been demanding oil producers increase output as global supplies were going into the “red zone.” OPEC was considering production cuts, and the IEA was urging oil producers to increase
production. “Global oil markets are going through a very sensitive period — global economic growth as well,” IEA Executive Director Dr. Fatih Birol told Bloomberg. “If the oil producers care about the health of the growth of the global economy, which I believe they do, they should take the steps to further comfort the market.”
Again last week, Birol warned Asian emerging markets of two downward pressures on global oil demand growth — high oil prices and the slowing of global economic growth.
It is questionable how the IEA came up with such a bearish monthly report after Brent prices reached four-year highs above $85 per barrel in early October. A few weeks later the tone changed when oil prices fell to $73 at the end of October. Then, in a total contradiction to the market evidence, the IEA issued its monthly report calling on OPEC to curb production next year by 300,000 barrels per day. Predicted demand growth for 2019 was also revised downward.
Huge contradictions emerge when IEA’s previous monthly oil market reports and its one-off announcements are scrutinized, leading to questions about the IEA’s World Energy Model (WEM) outputs and scenarios as well as its reading of market fundamentals.
The IEA revised 2018 global oil demand down by 0.13 million bpd to 99.16 million bpd, higher year-over-year by 1.28 million bpd versus 1.39 million bpd of year-over-year growth that was estimated last month.
The almost universal reduction in demand followed higher oil prices forecasted for 2019. However, the ongoing concerns and uncertainty that IEA has promoted over oil demand growth amid lower economic growth have no strong backing. Lately, oil demand has already reached or even passed the landmark 100 million bpd. This means that 2018’s annual oil demand growth rose to 1.9 million bpd, but in the IEA’s outlook it was much lower.
- Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza