The Energy Report 10/12/18
The Under Estimators
The International Energy Agency (IEA), famous for underestimating demand, is at it again, lowering their oil demand forecast for this year and next. This comes as oil starts to rebound after a surprise build in crude supply and a panicked stock market set prices tumbling yesterday. Yet, while the crude oil supply increase in the Energy Information Administration (EIA) weekly supply report seemed to be bearish on first glance, a drop-in distillate supply should be raising larger concerns about the market as we will see a sharp increase in demand when we start to rebuild in the aftermath of Hurricane Michael. The drop-in oil and ultra-low sulfur diesel were way overdone unless you believe that yesterday’s stock market sell-off was indicative of the global economy falling apart. The reality is that we may see the market, especially distillate, undersupplied as we go in winter.
Start with the IEA report. The IEA warns that “expensive energy is back — and it’s threatening the global economy.” Well if that is the case, then really the IEA is partly to blame. This is an organization that, despite evidence to the contrary, said that oil demand would be lousy in recent years and helped perpetuate the myth of lower for longer oil prices. Their underestimation of demand probably helped lead to underinvestment, leading us to where we are today. Is it any wonder why global spare production capacity is at an all-time low?
They are also warning of “twin peaks”. The IMF says that both global oil demand and supply are now close to new, historically significant peaks at 100 mb/d, and neither show signs of ceasing to grow any time soon. Fifteen years ago, forecasts of peak supply were all the rage, with production from non-OPEC countries supposed to have started declining by now. In fact, production has surged, led by the U.S. shale revolution, and supported by big increases in Brazil, Canada and elsewhere. In the future, a lot of potential supply could come to the market from places like Iran, Iraq, Libya, Nigeria and Venezuela, if their various challenges can be overcome. There is no peak in sight for demand either. The drivers of demand remain very powerful, with petrochemicals being a major factor.
Yet, they warn “As the oil market reaches the landmark 100 mb/demand level, prices are rising steadily. Brent crude oil is now established above $80/bbl, with infrastructure constraints causing North American prices to lag somewhat. Nonetheless, IEA position is that expensive energy is back, with oil, gas and coal trading at multi-year highs, and it poses a threat to economic growth.”
Yet they also point to the risk from trade disputes. The IEA revised demand outlook reflects these concerns: growth in both 2018 and 2019 will be 110 kb/d lower than our earlier forecast.
Yet, in fairness they are not alone. The International Monetary Fund and OPEC also cut their forecast of oil demand growth, not that their record is much better in the demand predicting that department. In my opinion, the underestimation in oil demand from these major agencies has proved detrimental to the global economy and many businesses. Their pessimistic forecast over the last few years helped feed the short fall, once again I feel they are underestimating demand and the underlying strength of the global economy. I also think they are overestimating the impact from the trade war fears.
Regardless of longer-term demand fears the focus should soon be how we are going to meet demand for distillate this coming winter. While the IEA wowed the market with a 6.0 million barrels crude build, it was enhanced with a 1.3-million-barrel release from the Strategic Petroleum Reserve (SPR) and it was smaller than the increase from the American Petroleum Institute(API). Distillate fuel inventories on the other hand fell by 2.7 million barrels 4% below the five-year average. That should be disturbing as the demand for that fuel will surge higher as there is a rush to rebuild the southeastern states because of the massive damage from Hurricane Matthew. You can focus all you want on short term demand destruction but the surge in demand will be unbelievable. This comes as winter is closer than you think and there is a tightness of distillate supply globally.
Gasoline inventories are a different story as those supplies increased by 1.0 million barrels last week and are about 7% above the five-year average for this time of year. Overall the selloff was overdone. If stocks can stabilize we should see these prices snap back. Be prepared for big volatility and remember that nothing really has changed that much. Iran sanctions are still going to happen, Venezuela is still going to collapse and shale pipelines are full to the max..
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network