What the mystery of the ‘missing oil’ can teach us
The past 20 months have seen crude oil futures act, at times, like the proxy trade for COVID-19. This dynamic was made evident the day omicron hit the headlines. Oil prices have rallied notably off that recent low, but remain more than $20 below “fair value,” based on our estimate of global petroleum inventories.
Much of what has been witnessed in the oil market since the newest variant appeared amounts to a collapse in the “financial demand” for oil. Actual oil demand in November hit its highest level since February 2020, and the very preliminary assessment we have published to clients suggest December’s rate is running above that figure.
The fact that oil prices dropped so much so quickly stems from its enormous “paper market.” More than 5 billion barrels of oil are traded daily on various commodity exchanges, which accounts for transactions in the unregulated over-the-counter space. These trading volumes are collectively 50 times larger than actual oil demand.
As we close out the year, a great deal of controversy surrounds the oil market outlook for 2022. As brazen as this may sound, we note that the consensus projection for the global oil balance to tilt into an over-supply situation seems off base. To start, non-OPEC supply projections are overly optimistic.
Most oil market watchers use the supply-and-demand figures published by the International Energy Agency as their own, so we will highlight that its non-OPEC supply projection for a 3.1 million barrels per day gain would mark the largest annual increase ever. That this growth rate has been swallowed hook, line and sinker by so many is striking, especially given the backdrop of vehement anti-carbon lobbying against the oil industry and cuts in capital budgets over the past seven years.
On global oil demand, the story is just as interesting, but for different reasons. There is a backdrop of public opinion about oil demand having peaked which is a misplaced perspective. In addition, the IEA is still publishing too low a set of demand figures going all the way back to the fourth quarter of 2014. If you do the math, the agency’s oil balance suggests there is an additional 2.8 billion barrels of oil sitting in global storage, which is simply ridiculous. These barrels are generally referred to as “missing oil.”
Most pundits will assert that “missing oil” sits on tankers circling the globe, ready to get dumped/delivered in consuming market centers. We have been following the global energy market for almost 40 years and will tell you that “missing oil” never, ever shows up. In point of fact, the volumes reflect a demand underestimation problem for non-OECD countries due to poor data infrastructure.
Historically, the IEA revises up its demand figures to wipe clean the slate of missing oil, but we are at a loss to explain why it has been dragging its proverbial heels on making these long overdue revisions. In its most recent monthly report, the agency did go back to the fourth quarter of 2014 and revise up demand its figures, but the upward adjustments were woefully short of what is needed.
Most readers probably will not recall that a situation like the current “missing barrel” episode resulted in a lawsuit against the IEA in 1999. It morphed into an audit by the Office of Management and Budget, the investigative arm of the US Congress, and ended badly for the agency. Whether we see a repeat of that or not matters little. What matters is that consensus projections for next year’s global oil balance dramatically understate the likelihood of a further tightening and the bullish oil price impacts we expect to continue to unfold.
- 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. He is also the author of ‘Cornerstones of Life,’ which is available on Amazon