Forget what you believe and believe what you see
The past week was “data rich” regarding the state of the global oil balance, partly owing to the release of various figures from the International Energy Agency (IEA).
What we found remarkable was the effort expended by the IEA to fashion a bearish message in the face of statistics that clearly point to bullish pressures. The IEA’s commentary on global oil consumption belied analyses used to arrive at an actual demand reading, which shows rates to have been stronger than our forecast. An even more contentious issue relates to the tally of “missing oil,” a topic that merits important background discussion.
When the IEA was formed in 1974, its mandate was to collect and disseminate data for member countries (i.e., the Organization for Economic Co-operation and Development). The near-16 million barrels per day of non-OECD demand at that time was considered inconsequential, so much so that shoddy data collection methods for these countries were considered sufficient.
Well, the past quarter century saw nearly 100 percent of global oil demand growth come from those non-OECD nations, but the data collection methods have remained problematic.
Many non-OECD demand readings are still lagged by up to five years. Most market watchers are unaware that the IEA employs a method to econometrically estimate usage from the last “hard data reading” based on estimated gross domestic product (GDP) rates and an assumed ratio of oil-demand-growth-to-GDP-growth. This methodology unfortunately results in chronic under-estimation, a phenomenon dubbed “missing oil.”
“Missing oil” is not a new problem. About 23 years ago, the General Accounting Office, the investigative arm of the US Congress, audited the IEA’s methodology because of allegations that its oil balance data was grossly inaccurate.
The figure we were publishing at that time for “missing oil” (which was at the heart of those broad concerns) was over 800 million barrels. That episode ended badly for the IEA and, amazingly, the “missing oil” tally now totals over 2.4 billion barrels.
This figure exceeds the actual capacity of the global oil tanker fleet.
As a point in fact, most pundits will assert that “missing barrels” are on ships at sea waiting to come to port, but there has never ever been a case where those barrels appear. As such, the IEA quietly makes upward revisions to its demand series to resolve the issue. Why it has been negligent on these necessary revisions is puzzling. What compounds the issue stems from almost every financial service firm simply repackaging the IEA oil balance model as its own, making IEA figures the de facto consensus assessment. The material under-estimation of demand means, at a minimum, that the global oil balance is much tighter than generally believed.
Lastly, and knowing this may appear myopic, there’s a well-documented inverse correlation between gasoline prices “at the pump” and the US president’s public approval rating. With mid-term elections on the horizon, the past week saw those politics in action with a request from President Joe Biden’s administration for the Organization of Petroleum Exporting Countries (OPEC) to raise output to help lower gasoline prices.
As a point in fact, most pundits will assert that “missing barrels” are on ships at sea waiting to come to port, but there has never ever been a case where those barrels appear.
The plea came a half year after the same administration canceled the Keystone Pipeline project (in the name of climate protection), which would hve expanded the volume of Canadian crude available to US refiners. Canadian crude, by the way, would help increase US refinery output of motor fuel.
Moreover, the solicitation for OPEC barrels followed the administration’s cancellation of new leases for oil exploration and production on federal lands/waters — and there have been separate but related indications about the administration wanting to increase taxes on oil companies.
Leaving aside the hubris, such ploys to manipulate oil prices lower were attempted by former President Bill Clinton’s administration and included non-emergency sales of crude held in the Strategic Petroleum Reserve (which are for bona fide emergencies). Analyses we have published for our clients show those schemes to have backfired miserably — oil prices actually rose as those emergency stocks were sold.
We expect OPEC will politely convey a “hard pass” to the White House about pushing extra supply into the market given its internal oil balance outlook and the concerns about demand being negatively impacted from pandemic variants.
• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986.