Friday, January 16, 2015

Sad Situation of World Oil Markets

There are 3 most important information sources about the developments in the world oil markets: IEA’s Oil Market Report (IEA OMR), OPEC’s Monthly Oil Market Report (OPEC MOMR) and the US EIA’s reports, particularly Short Term Energy Outlook (STEO). Everyone who follows the oil markets closely read at least one of those resources, particularly the world oil supply-demand balance tables those reports, regularly. Each institution produces those tables in a different format but they basically contain the similar flows.

 To me the best and most comprehensive source of data is the IEA, at least for the OECD countries because all the energy statistics are submitted to the IEA by the governments (legally binding). Quality and definition of the data coverage vary among those sources.

 All the 3 sources mentioned above provide monthly production data, which are relatively easy to find. Demand data, however, are provided (usually) quarterly despite more than half of the countries in the world do not collect quarterly oil demand statistics. For many countries in the world we do not have yet (as of January 2015) even the oil demand data for the year 2013. Therefore, whatever you see in those 3 sources for 2013 (logically also for 2014) world oil demand is not more than an estimate. Then how come we have quarterly or monthly demand figures for 2014? Good question. God and the people who make up those numbers only know where they originate from!

 Let me put bluntly: analysts try to interpret the daily sings in oil prices based on available estimates for oil production in previous month (in poor quality and revised very frequently) and guesstimates for oil demand in previous quarters. Data for stock changes in most non-OECD countries, if you believe me, are one of the wildest guesses that appear in oil supply-demand balance tables. Isn’t that great?

 And yet, we have been hearing, reading, listening in the media since July last year that the price of oil continues to collapse as rising supplies collided with weak demand growth, or prices plunge as oversupply weighs on market. Is that really so? How do you know? Well, yes, the world oil supply-balance tables indicate so! But at least half of the numbers in those tables for 2014 are estimates, no?

Let us look at summary world oil supply-demand balance tables of the IEA, EIA and OPEC, all released in January 2015. Note that I re-arranged the tables in order to have a kind of similar main aggregates. I focus only in 2014.

 Table: Comparison of World Oil Supply Demand Estimates

There are a few quite close matching rows. The first one is OECD demand. Why? Because the source is the same and IEA data for OECD oil demand, in my opinion, is next to impossible to challenge. Non-OECD oil demand figures vary as much as 1 mbd (million barrels per day).

Total supply figures sometimes do not show processing gains and biofuels production separately. Therefore you cannot make one-to-one comparison for OECD. But if you include all biofuels production and processing gain figures into the OECD line, you get make a rough comparison. What else you can compare is the OPEC figures. But they do not match at all. Sure, why should they? Even OPEC uses secondary sources in its world oil supply-demand tables. (Note: According to secondary sources OPEC crude oil production in 2013 was 30.198 mbd. But it was 31.599 according to the direct communication of OPEC with its members. See pages 61 and 62 in OPEC MOMR Jan2015. Funny, no?).

Which supply-demand numbers should we believe? Well, if you take one source alone, you will see excess supply for each quarter in 2014. BUT if you think that IEA is the most reliable for world oil demand and OPEC for world oil supply, then you would get the pink shaded area as balance, i.e., demand is in excess of supply.

 Chart: Comparison of World Oil Supply Demand Estimates

This chart in fact summarizes the situation of the world oil statistics. How sad!

In the next post, I will dig a bit deeper to show some funny things.