EIA Monthly Oil Forecast and STO

Jim Brown
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In the monthly update of its global oil forecast the EIA claims oil prices will average $83.50 in 2011. I want some of what they are smoking please.

In the monthly Short-Term Outlook (STO) the EIA predicts that oil will average $80 in 2010 and then jump to $83.50 in 2011. "The world oil market should gradually tighten in 2010 and 2011, provided the global recovery continues as projected. The forecast assumes a U.S. GDP growth of +2% in 2010 and +2.7% in 2011."

The 2010 price prediction of $79.83 is up from last month's prediction of $78.67 per barrel. I don't see how the EIA can lose. Each month you average in the prior months of the year and then project it for the rest of the year using seasonal factors. It sounds legitimate but did you get the punch line in that sentence. As long as they are averaging in the past months each time they will eventually end up with exactly the average cost they predicted the prior month. It is crazy to predict a price for the year by adding in the average of the prior months. At the end of December you will always be exactly right.

Also, predicting prices every month allows them to adjust their prior months prediction. For instance this month they predicted $83.50 in 2011. Next month they could predict $84.50 or $82.50 based on the current price action. If they adjust it by $1 every month they could be at $95 by year-end without ever waking anybody up. Once into 2011 they will average the price every month and end up 100% correct at year-end regardless of whether it is $65 or $165. This is the foolproof way to predict prices.

Most non governmental analysts whose reputation is riding on what they say are talking about $100 oil by year-end 2010. Quite a few are predicting $150 by year-end 2011. Those numbers are so far away from the EIA projections they are not even in the same country. The EIA is your tax dollars at work.

The EIA also projected gasoline prices to average $2.84 in 2010 and then rise to $2.96 in 2011. Again, I want some of what they are smoking.

The EIA expects global oil demand to grow by 1.1 mbpd in 2010 and another 1.5 mbpd in 2011.

The EIA said global demand declined for the second consecutive year. That is the first time since 1983 that has occurred. Global non-OPEC supply rose by 600,000 bpd with the increases coming from USA, Brazil and Former Soviet Union. In 2010 this net increase is expected to fall to only 400,000 bpd and then to a drop of -140,000 per day in 2011. Large declines in the North Sea (-700,000 bpd) and Mexico (-400,000 bpd) will offset that growth.

Non-OPEC supply averaged 50.29 mbpd in 2009 representing 60% of total world supply. Russia was the largest non-OPEC producer at 9.93 mbpd.

Brazil is expected to contribute the most new non-OPEC production over the next two years with annual production expected to grow by +410,000 bpd. The U.S. is expected to contribute 230,000 bpd. However there is trouble ahead regardless of the EIA STO projection.

The following is a paragraph from the STO supplement just released. (emphasis mine)

Rising liquids production in Azerbaijan and Kazakhstan should represent an important source of non-OPEC supply growth. Production in the two countries is expected to grow by combined 230,000 bbl/d in 2010, but growth should then slow to 120,000 bbl/d in 2011. Much of the growth in 2010 is the result of the ramping up of several new projects that came online in 2009, and there is a lack of sufficient new projects in the 2010-2011 period to fully offset declines at mature fields by 2011.

Lack of sufficient new projects in 2010-2011 to offset declines in mature fields. No kidding! Thanks for the update. At least somebody there can count.

More from the STO supplement:

Offsetting these new sources of non-OPEC supply are several countries that should see sizable declines in their liquids production. The largest decline is expected to occur in Mexico, where production could fall by 430,000 bbl/d between 2009 and 2011. Once ranked as one of the largest in the world, production at the Cantarell field is now about one-quarter of the level seen at its peak in 2004. Increasing production from other fields, such as the Ku-Maloob- Zaap (KMZ) complex, have helped to mitigate some of this decline. However, it is unclear how much higher production at KMZ and other fields can go. As a result, Mexico's net liquids exports could fall from 950,000 bbl/d in 2009 to 520,000 bbl/d in 2011.

Production in the North Sea peaked in 1999 and has fallen by near 50 percent since then. EIA expects North Sea liquids production to fall by 670,000 bbl/d between 2009 and 2011, the result of declining production in both the United Kingdom and Norway. The decline in offshore U.K. production could accelerate during the forecast period, as there is a lack of new projects on the horizon to fully offset falling production at older fields. In Norway, mature oil fields continue to decline, but this is partially offset by rising production of natural gas liquids.

While these three countries represent the largest share of the decline in non- OPEC liquids supply, many additional non-OPEC producers should also experience falling production during the forecast period. Such countries include Egypt, Malaysia, Yemen, Australia, Argentina, Gabon and Syria. While individually somewhat small, the cumulative effect of declining production in these producers is quite important in the aggregate.

There are some significant decline numbers in those paragraphs. Just the drop in North Sea and Mexico totals 1.1 million barrels per day. Not to mention the "somewhat small" declines in other countries. The EIA does not mention the continuing declines in over 60 other countries.

There is a lot of data in the STO even if the authors are shading the facts slightly to present a positive outlook for governmental reasons. It will be interesting to see how they deal with 2012 once the calendar rolls around there is a large net drop in supply because of depletion and a lack of new projects due to the 2008 financial crisis. Right now there is a void on the charts for material new production coming online in 2012-2013 because of cancelled and delayed projects for price and financing reasons.

If you want to read the entire STO click here: EIA STO REPORT

Jim Brown