This week the key agency forecasts have been published. EIA published STEO last week, OPEC published MOMR yesterday, and the IEA published its OMR this morning.
Demand was the main source of discrepancy across the key agency forecasts this month. Downside revisions to demand pulled both the IEA and EIA Q4 17 and 2018 estimates lower. Perhaps the greatest oddity, and most worrying, was contained in the IEA’s 2018 demand forecast, which was revised down by 0.19 mb/d. The IEA appears to have stumbled upon an ancient price-elasticity model, which has taken their 2018 growth estimate down to a four-year low, despite the generally strengthening macroeconomic landscape. We fear that their very modest 1.3 mb/d growth estimate not only misses the absolute scale of the pending oil price rise, but also misses the very raison d’être for higher prices—strong gains in demand and their tightening impact upon the fundamentals. And even if OECD demand growth stalls next year—which we assume will occur—there is plenty of slack to be picked up by the non-OECD, with Latin America and Middle East bottoming out and the outlook for India looking brighter.
On the supply side, the EIA takes the lead by forecasting very strong non-OPEC supply growth of 1.5 mb/d in 2018, with the IEA just behind at 1.4 mb/d, while OPEC sees a more modest 0.9 mb/d gain. We foresee non-OPEC supply growth of closer to 1.4 mb/d in 2018.
Ultimately, prices are rebounding as the fundamentals tighten, but neither the IEA nor the EIA seem to have noticed this. The IEA’s OMR alludes to an oversupply in Q4 17, as it sharply curtails its demand estimate citing ‘higher prices and relatively mild winter temperatures’, with a similarly dark rhetoric contained in the EIA’s STEO. OPEC’s MOMR provides a welcome dose of realism in this world of muddled institutional thinking, as their balances (extrapolating with our own OPEC supply estimates) show a sizeable Q4 17 deficit, as do our numbers.
Indeed, preliminary data for October show another 24 mb draw in total OECD stocks to 2,946 mb, with the overhang to the five-year average declining to 136 mb. The OECD crude overhang is now less than 100 mb. This follows from a September drawdown of 40 mb in stocks to a two-year low. On a days of forward cover basis, products stocks are less than 1 day above the five-year average. Floating storage continues to come down and non-OECD inventories are falling sharply—with China’s 1.2 mb/d destocking in October a case in point. The market has effectively destocked two-years’ worth of crude in the span of four/five months. This is why physical markets are soft right now, and it also shows just how strong underlying demand has been.