Mixed Messages From Oil Reports

Jim Brown
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The various energy agencies all released versions of their monthly oil reports suggesting oil demand "growth" could slow in the coming months. That always confuses people when the headlines proclaim "EIA lowers estimates of oil demand." People don't always understand they are cutting GROWTH estimates not actual demand levels.

The International Energy Agency (IEA) said global oil production averaged 88.7 million barrels per day in July. That was a +600,000 bpd increase over June levels thanks to higher output by Saudi Arabia, Kuwait and the UAE.

They also said demand had declined slightly by -100,000 bpd year to date. Demand had been depressed by high prices, low growth and the Japan earthquake.

The IEA cut its estimates for demand growth for the full year by 60,000 bpd to 89.5 mbpd for 2011 and raised 2012 growth estimates to 1.6 mbpd totaling demand of 91.1 mbpd. The 2011 estimate is +1.2 mbpd higher than 2010. The IEA said higher demand in 2012 could come from additional oil fired electricity in Japan with half their nuclear plants offline. Increased demand from Japan is expected to be +100,000 bpd.

OPEC also released its monthly outlook on Tuesday and said a weak global economy would slow growth in 2011 but pickup again in 2012. OPEC said slower economic growth could reduce the expected oil demand growth in 2012 by -60,000 bpd to 1.64 mbpd.

If you take the OPEC number for 2012 for an increase in demand of 1.6 million barrels per day that is still a huge increase. Subtracting 60,000 bpd was a drop in the bucket but the headlines saying OPEC slashed their estimates for oil demand in 2012 may have garnered a lot of readers but they definitely got the wrong impression from the headline.

The U.S. Energy Information Agency (EIA) raised its estimates but the news got far less coverage in the press. The EIA said oil demand rose to a record of 86.8 mbpd in 2010 and it expects demand to grow by 1.4 mbpd to 88.2 mbpd in 2011 and another 1.6 mbpd in 2012 to 89.8 mbpd.

The EIA says 2012 demand it 89.9 mbpd, IEA 91.1 mbpd and OPEC 89.74 mbpd. Regardless of how you slice it there is still a significant pattern of annual demand growth and the EIA had an interesting sentence in the headline paragraph that NOBODY reported in the press.

"Global oil demand growth, led by China, is expected to outpace the growth in supplies from countries outside of the Organization of the Petroleum Exporting Countries (OPEC), leading markets to rely on both a drawdown of inventories and production increases in OPEC countries to close the gap. However, OPEC countries are not expected to markedly increase production over the next few months."(emphasis added)

The EIA says the current supply shortfall is 700,000 to 810,000 bpd thanks to the halt in Libyan production and lack of any light crude to replace it.

Non-OPEC supply increases are expected to be in the range of 650,000 bpd through 2012. Over the same period the EIA expects North Sea declines of -140,000 bpd and another -140,000 bpd in Yemen. The EIA expects 50% of the Libyan production to come back online in 2012 but the IEA believes it will be a lot later with regular production not returning until 2015.

Because demand is expected to be more than supply for the rest of 2011 and all of 2012 the EIA expects commercial inventories will consistently decline as existing supplies are drawn down to offset the current production shortages.

The EIA expects WTI prices to average $96 in 2011 and over $100 in 2012.

Here is the bottom line. All three entities believe demand will increase by more than 1.2 mbpd in 2012 yet production is going to increase by less than half the amount of the demand increase. Does anyone else see a problem here?

You can't continue to increase demand at more than twice the rate of production increases and not experience a significant shortage when inventories decline to critical levels.

The facts are everywhere in black and white but nobody is paying attention. This story is going to end badly and nobody is skipping to the end of the book to see the conclusion.

Demand growth exceeds production growth and the conclusion is obvious.

Jim Brown

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