Scale of Oil’s Swing to Surplus Is Next Year’s Big Market Puzzle
(Bloomberg) -- The oil market is about to swing into a healthy supply surplus if the world's big international energy forecasters are to be believed.
The scale of that shift -- so critical to what the price of crude does next -- is heavily dependent on something that leading producer countries have collectively failed to do time and time again in recent months: pump as much as they're supposed to.
The latest outlooks from the International Energy Agency, the Organization of Petroleum Exporting Countries and the U.S. Energy Information Administration all show the global oil deficit shrinking in the current quarter and flipping into surplus next year — provided that the OPEC+ producer group’s members all hit individual output targets under their supply deal.
Those targets envisage the group’s combined production increasing by 400,000 barrels a day each month until at least April, when the baselines against which cuts are measured are revised for several of its members. OPEC+, as the group is known, refused earlier this month to heed customers’ requests for a bigger increase in December, arguing that the market is well supplied.
The forecasts of all three agencies would appear to support that view, if the producers can pump as planned.
But that ability is questionable. Of the three agencies, only the U.S. EIA forecasts OPEC production and it sees that running well below the target level as we move through 2022 (see chart below). In contrast, analysts at OPEC used target production levels in the forecasts they presented to ministers before the meeting earlier this month.
Data for October suggest that the EIA may be closer to the mark than OPEC. The producer group published estimates of its members’ October output in its latest monthly report. They showed an increase of just 136,000 barrels a day from September, less than one-fifth of the jump assumed in the forecast presented to ministers in late October.
The impact on oil balances next year is significant. Using the EIA’s demand and non-OPEC production forecasts and the OPEC+ output targets for OPEC members, global oil supply exceeds demand by 900,000 barrels a day in the first quarter of 2022 and the glut increases throughout the year. But if we substitute those targets with the EIA’s forecast of OPEC production, a very different picture emerges.
The first-quarter supply surplus is virtually wiped out, with a small stock build in January offset by further draws in February and March. The subsequent builds in global inventories don’t exceed 1 million barrels a day, in contrast to the 3 million barrel-a-day increase seen in 4Q22 when using the OPEC targets (see chart above).
Nonetheless, the three agencies still see market tightness easing as global supplies increase.
Changes to oil demand from last month’s outlooks were modest, with the biggest upward revisions being made to the current quarter by the IEA and EIA, while OPEC has trimmed its expectations of oil use over this and the next two quarters. Those higher fourth-quarter demand projections were offset by similar increases in non-OPEC supply from the IEA and EIA.
For 2022, the IEA and EIA both increased their forecasts of non-OPEC production, while OPEC cut its forecast for the first half of the year and increased it for the second half.
The net result of the tweaks to demand and non-OPEC supply forecasts is that all three agencies now see the world’s need for OPEC crude in 2022 lower than they did a month ago. The average reductions for the year range from 100,000 barrels a day in the IEA’s view to 160,000 barrels a day according to OPEC, compared with the October outlooks.
That is feeding into the expectation of a switch from supply deficit to surplus in the coming months, but the size and duration of the glut will depend on the willingness and ability of OPEC+ countries to pump in line with their rising targets. And that’s something that they collectively haven’t done in the past six months.
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