Oil Agencies Diverge on Peak Stocks, Length of Return Journey

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There’s no doubt that excess global oil stockpiles are draining quickly. But just how fast they are falling and how far they still have to go remains a matter of contention.

The world’s three major oil agencies — the International Energy Agency, the U.S. Energy Information Administration and the Organization of Petroleum Exporting Countries — have diverged significantly since January in revising historical demand estimates and that has big implications for how far stockpiles have moved from normal levels. The agencies also have very different views on the speed at which excess inventories are being depleted.

All three see the pace of stock draws slowing in the current quarter, following big reductions in the second half of last year. But the IEA and OPEC see a much more dramatic slowdown than their U.S. counterpart (see chart below). That is due in large part to big downward revisions to demand estimates as a result of renewed virus-induced lockdowns in Europe and an increase in cases in parts of Asia. OPEC slashed its demand forecast for the current quarter by 950,000 barrels a day from last month’s report and cut year-on-year growth from 1.25 million barrels a day to just 120,000 barrels . The IEA’s reduction to first-quarter demand was smaller but, at 450,000 barrels a day, still significant.

Oil Agencies Diverge on Peak Stocks, Length of Return Journey

At the same time as cutting demand, they have raised their assessments of non-OPEC production in the first quarter, with the IEA increasing it by 400,000 barrels a day and OPEC by 120,000 barrels. Those changes have reduced their assessments of how much crude the world needs the OPEC countries to pump by 850,000 barrels a day, according to the IEA, and by almost 1.1 million barrels a day, according to the group’s own analysts.

The IEA remains cautious about demand, cutting its forecasts for both the second and third quarters, but OPEC is more optimistic, raising its demand forecasts for all three subsequent quarters this year.

It’s not just their views of the future that have changed. This month’s reports from two of the agencies highlight the difficulties, not just of forecasting oil flows, but also of assessing what has already happened. 

The IEA and OPEC have both made significant revisions to their global oil demand numbers for 2019. That may seem like ancient history — a time pre-pandemic — but it has important implications for the year ahead. The revisions, up to the third quarter of last year, were almost mirror images of each other, with the producer group raising its assessments of consumption and the consumer group cutting its numbers (see chart below).

Oil Agencies Diverge on Peak Stocks, Length of Return Journey

The IEA reduced its assessment of 2019 global oil demand by 330,000 barrels a day after new annual estimates became available for several non-OECD countries, including Brazil, China, India, Indonesia and Thailand. It also cut its figures for the first three quarters of last year by an average of 300,000 barrels a day. OPEC, in contrast, raised its estimate of demand by 220,000 barrels a day for 2019 and by 227,000 barrels a day over the January-September period in 2020.

With no significant changes to production estimates over those periods, that’s led to a sharp divergence between the two agencies in their implied global inventory levels. In the absence of published estimates of global oil stockpiles, tracking the imbalances between supply and demand is the only way of estimating how they are changing.

The IEA now sees global oil stockpiles at the end of the second quarter of 2020 — the point at which it sees the balance shifting from stock builds to draws — 173 million barrels higher than it did a month ago. In stark contrast, OPEC sees them as being 121 million barrels lower than it did in January (see chart below).

Oil Agencies Diverge on Peak Stocks, Length of Return Journey

A month ago, the IEA saw excess global stockpiles at the end of the second quarter of 2020, compared with the end-2018 level, at 1.57 billion barrels, while OPEC assessed them at 1.49 billion barrels, a difference of 84 million barrels. Over the past month that gap has widened to 378 million barrels as a result of the changes to historical demand estimates.

The IEA now sees global oil stockpiles almost 820 million barrels above end-2018 levels by the close of this year, up from a 422 million barrel surplus seen a month ago, while OPEC sees the surplus at 380 million barrels, down from 690 million barrels in January, assuming in both cases that the producer group sticks to its current output targets, with no further increases beyond ending Saudi Arabia’s voluntary cut in April.

If the rate that oil is pulled from inventories remains at the levels currently forecast for this year, getting stockpiles back to their end-2018 level would be delayed by nine months, until the second quarter of 2023, using the IEA’s numbers. But it would brought forward by three months to the third quarter of 2022 in OPEC’s view.

Oil Agencies Diverge on Peak Stocks, Length of Return Journey

The EIA has made only minor changes to its historical supply and demand numbers and, as a result, its path for global stockpiles is little changed, too. It differs significantly from the other two agencies in seeing global inventories back below end-2018 levels by the middle of 2021.

This month’s reports highlight the huge uncertainties around demand growth in the coming months, as the world continues to battle the coronavirus pandemic and analysts attempt to assess the impact of the roll-out of vaccines on global travel and economic activity. The outlooks may only begin to converge as that impact becomes clearer.

©2021 Bloomberg L.P.

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