IEA and analysts unreliable for oil …listen the Saudi The future price of oil has never been easy to forecast, to be fair, but the 2023 trends were so different from forecasts that we may have entered a whole new era of forecast uncertainty in oil. Or perhaps there’s too much focus on the wrong factors to make forecasts. “At this time last year, there were a lot of consensus views that the U.S. was going to have a recession and there’s going to be a large global slowdown,” ConocoPhillips chief economist Helen Currie said during a panel at the industry event, as quoted by Freight Waves. “That created a lot of negativity for oil markets and other commodity markets.”
Indeed, expectations of a recession in the United States made up one of the main bearish factors for oil price predictions. It is a safe assumption to make that when the economy shrinks, so does energy consumption, but those who leaned on that assumption for their oil price predictions must have forgotten that when it comes to oil there is one important other factor to consider: elasticity.
Oil is perhaps the most inelastic commodity in the world due to its multiple uses. Because of that, even when a large economy such as the U.S. is doing badly, the impact of the recession on oil demand would not be as marked as it would be on other, more elastic goods such as, for example, fashion.
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It’s not just U.S. demand that appears to have surprised a lot of analysts. Trafigura’s global head of oil, Ben Luckock, noted during that panel that demand as a whole had surprised analysts last year. And so had supply, notably from the United States.
On the demand side, some of the reasons it was a surprise to analysts are quite easy to see. On the one hand, we have had the International Energy Agency make prediction after prediction of falling oil demand thanks to greater adoption of electric vehicles. None of these predictions panned out, even as EV sales reached a record high last year.
The International Energy Agency wasn’t the only one predicting weakening oil demand because of the transition to alternative sources of energy. It was one of many outlets that made such predictions—repeatedly. It was all too easy for people physically involved in the oil market to assume that these were correct, thanks to the sheer number of those forecasts, if nothing else.
On the other hand, last year’s oil market was even more fixated on China than usual. But it was fixated on perhaps the wrong aspect of the market: economic growth. Just like with the United States, Chinese oil demand showed stronger resilience and growth than expected because most expectations made a direct link between economic growth prospects and oil demand trends.
What’s even more puzzling is the fact that China’s economy, unlike the U.S. one, was never on the verge of a recession last year. In fact, it continued growing at pretty solid rates with government support. The problem for analysts—and, by extension, oil traders—was that growth fell short of… forecasts. Instead of considering that these forecasts may have been unrealistic, oil traders appear to have opted for interpreting the numbers as a sign of weakening demand for oil.
Supply also seems to have surprised analysts, but this appears a more justified surprise as even the U.S. shale industry was kind of surprised by what it can do with longer horizontal wells. Last year, what it did was increase well productivity so substantially that the Energy Information Administration joined the IEA in the embarrassing position of a forecaster who keeps getting figures wrong.
For several months in a row, the EIA predicted that shale oil output, including in the Permian, would decline. For every one of these months, the EIA forecast was proven wrong by actual production numbers.
On the other hand, a lot of analysts appear to have underestimated the effect of the OPEC+ cuts. Last year, these were dismissed as insignificant due to the expectations of weaker demand and the fact that although less oil was being produced, the capacity to produce more of it was there.
This year, it has begun to dawn on those OPEC spare capacity fans that this spare capacity means little if it is not put into use—and OPEC has signaled repeatedly it has no intention of putting it into use until it sees higher prices.
It was only recently that talk about a tighter market began, including, notably, from the IEA, which had to revise its demand outlook yet again, adding 110,000 bpd to it in its latest monthly report. The reason it had to revise it was higher-than-expected demand during the first quarter on a stronger-than-expected U.S. economy and higher demand for bunkering.
That higher demand for bunkering was a surprise for the IEA even if it wasn’t for shippers rerouting from the Red Sea to the Cape of Good Hope. It is surprises like this that lead to such unrealistic expectations about the oil market.