The past two weeks have seen the three key agencies publish their monthly forecasts. The EIA published STEO on 8 May, OPEC published MOMR yesterday and the IEA published OMR this morning.
Misdiagnosing a central pillar of accurate fundamental analysis—demand for the IEA and non-OPEC supply in the EIA’s case—dramatically deters from the value that can be extracted from either of these two organisations’ most recent reports. As such, the IEA and EIA both fail to capture the tightness expected in H2 18, with neither agency estimating the call on OPEC to be much above 32 mb/d. We think this is at least 1 mb/d too low, which is a particular concern given looming Iranian and ongoing Venezuelan supply shortfalls.
At 1.4 mb/d for 2018, the IEA’s latest estimate of demand growth not only fails to accurately reflect its own recent history (data thus far for 2018 exceeded last month’s expectations by 0.1 mb/d) but also severely lags the forecasts of the EIA (1.8 mb/d), OPEC (1.6 mb/d) and ourselves (1.6 mb/d). Most concerning, however, is the IEA’s continued insistence on using outmoded price elasticity models. In a dramatic oversimplification, the IEA this month claims that an increase of 9% in oil prices will reduce its prospective second half of the year demand estimate by 0.27 mb/d. Oil demand is a more dynamic creature than implied by such simple linear price elasticities, as it tends not only react to changing prices with a lag but also to a greater degree above certain thresholds (our research highlighted the looming influence of plus-$80 oil). Most importantly, we found oil demand growth to be most influenced by changing oil prices, and not absolute demand as the IEA wrongly concludes. As the IEA continues to downgrade its demand forecast, often in the face of evidence to the contrary, the conclusions that can be drawn from its report lose value. The market may panic on these headlines but we expect the IEA to eventually raise its forecasts.
The other major misdiagnosis in the month’s key agency reports is the EIA’s continued overestimation of 2018 non-OPEC supply growth. By forecasting non-OPEC supply growth of 2.5 mb/d in 2018—higher than ourselves (by 0.9 mb/d), OPEC (by 0.8 mb/d) and the IEA (by 0.6 mb/d—the EIA fails to sufficiently acknowledge pending infrastructure constraints, particularly in the US where it sees supply growth of 2.0 mb/d vs our own 1.6 mb/d estimate.
OECD commercial stocks now stand below the five-year average, at a three-year low of 2,819 mb in March, while preliminary April figures point towards a counter-seasonal flattening, increasing the deficit to the five-year average to 14 mb.