OPEC and the IEA Square Off with Competing Predictions

Jim Brown
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OPEC and the IEA gave vastly different projections for future oil demand in Friday's updates. The OPEC outlook was relatively bearish but the IEA used terms like "giddy" when describing recent demand trends.

The OPEC update said they expect oil demand to rise by +1.18 million barrels per day in 2011. That was an increase of only 10,000 bpd over their prior update. They believe demand for 2011 will average 87.11 mbpd.

The IEA raised its prediction to oil growth of 1.32 mbpd in 2011, a gain of +130,000 over their last update.

Crude demand rose +2.47 mbpd in 2010 over 2009. Of course that rebound came off very low demand in 2009 due to the effects of the recession.

Crude prices rallied to $90.76 last week and the highest level in two years based on the very strong pickup in demand during the third quarter. According to the IEA demand growth in Q3 spiked to 3.3 mbpd over the same period in 2009. The IEA believes that demand was temporary unless we were to get a blast of really cold winter weather. I believe the type of blast they were referring to actually happened last week. That should boost demand for heating oil in Q4.

OPEC's official policy is happiness with $90 oil. The OPEC Secretary General said they could not increase production even if crude hit $100 because the market was well supplied and the spike in prices was due to speculation and the decline in the dollar.

If the IEA demand prediction comes true OPEC would need to pump a minimum of 100,000 bpd more in 2011. That would boost their output to 29.5 mbpd.

The IEA said it was industrialized nations that increased consumption in Q3 and it almost matched the increase in China and other emerging markets. China saw oil demand climb by 12.6% in October alone.

To further complicate the outlook the EIA raised their demand growth estimate for 2011 to +1.43 mbpd. That gives us three different outlooks. The OPEC growth forecast is +1.18 mbpd, IEA +1.32 mbpd and EIA +1.43 mbpd.

The IEA updated their longer view saying between now and 2015 oil demand would rise an average of 1.4 mbpd per year. This would require OPEC to produce 32.35 mbpd in 2015. That is an increase of about 3 mbpd over their current levels.

This is where it gets interesting because I don't think they have another 3 mbpd of light crude excess capacity. The market sure does not believe them. The official party line claims between 5.35 and 6.3 mbpd of excess capacity. That is also based on and includes the 4.5 mbpd cut they made in December 2008. They barely have 50% compliance with the production cut meaning they are already producing more than 2 mbpd of their supposed excess capacity.

OPEC has never produced at their currently claimed peak capacity. Nobody knows if they can do it or not. With every year that passes the IEA says OPEC loses -4.5% to depletion. Using the current production rate of around 30 mbpd that means they are losing about 1.3 mbpd of production every year.

The IEA predicts we will lose 50% of global production from existing fields by 2020. That is a terrifying thought.

The IEA warned China's economy was in danger of a "hard landing" and internals indicators showed it was overheating. The IEA also said inflation was rising much faster than China's official reports claimed. This suggests China may have to take aggressive action to slow the rate of growth to something less than 10%.

The Total (TOT) CEO said Friday they need oil prices over $80 in order to make future projects profitable. With oil prices under $80 many projects needed to replace dwindling production will not get done. He said the higher costs of ultra deepwater drilling and massively higher expenses in places like Canada's oil sands needed a minimum of $80 to justify the investment.

He said oil companies will have to continue to move into harsher conditions and climates around the world or we will face oil shortages very soon. He said Total would continue to invest in natural gas even though prices were very low today. De Margerie said large fields take 5-7 years to begin production so continued investment now was required to have gas in 2017.

Beware what you wish for Mr DeMargerie. With oil prices at $90 we could be very close to another economic decline. Three years ago economists believed $85 was the tipping point at which economies would begin to feel pressure from fuel expenses. This year they are calling it $90 because of the decline in the dollar. Over $90 may be profitable for Total but it will begin to weigh on consumer spending.

We are already seeing gasoline at more than $3 in 21 states. That is the first time in decades consumers had to decide between filling up the tank or holiday shopping in December. If oil rises to $100 economists expect to see further job losses and a slowdown in new businesses.

Oil companies probably won't have to worry about oil prices in 2011 and beyond but they will have to worry about demand growth other than China and the emerging markets. This is one of those situations where we know prices are going to rise and we know the economy is eventually going to tank because of it but there is really nothing anyone can do about it.

Jim Brown

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