Oil Overbought, But Hanging Near 2-Year High

Different Worlds

It seems that OPEC and the International Energy Agency live in different worlds when it comes to projecting future energy demand. While OPEC in their monthly report expects to see a larger oil supply deficit in 2018, the International Energy Agency (IEA) sees the appetite and an market oversupplied in the first half of 2018.

The International Energy Agency’s forecast on demand have been abysmal and now once again they are low balling demand at least compared to OPEC which says that said oil use would grow faster than previously thought due to a stronger-than-expected world economy. OPEC says that “The global economic growth dynamic has continued its broad-based and relatively strong momentum,” OPEC said. “The ongoing momentum could still provide some slight upside potential.”

The International Energy Agency on the other hand is saying that global oil demand growth is likely to increase more slowly over the coming months, doubling down on their previous underestimation demand, because of their prediction that warmer temperatures will cut consumption, which may tilt the market back into surplus in the first half of next year. They then put in a downward revision for oil growth down by 0.1 mb/d for both 2017 and 2018. Yet they had to admit that they now see increases of 1.5 mb/d in 2017 (or 1.6%), to 97.7 mb/d, and 1.3 mb/d in 2018 (or 1.3%) to 98.9 mb/d, so in other words their previous demand forecasts were wrong,

On the other hand OPEC demand for their oil is up to 33.42 million barrels per day (bpd) of OPEC crude next year, an increase of 360,000 bpd from its previous forecast and the fourth consecutive monthly increase in the projection from its first estimate made in July. OPEC also says in contrast to the IEA that demand will rise by 1.51 million bpd next year, up 130,000 bpd from previously, to 98.45 million bpd. They put world economic growth at 3.7 percent, up from 3.5 percent in their last report.

OPEC also says that OPEC said inventories in developed economies declined by 23.6 million barrels in September to 2.985 billion barrels, to just 154 million barrels above the five-year average. OPEC say that the excess in the oil market overhang has fallen considerably and they are on target with their cuts.

My view of the two reports is that the International Energy Agency is wrong. It is kind of funny to say this but OPEC, with its compliance to production cuts and its more accurate forecasts, has gained more credibility than the International Energy Agency. The IEA has time and time again underestimated demand and this time instead of looking at the very strong economic fundamentals they are betting on warm weather to make their forecast come true. There is no doubt that weather influences demand for oil, but I think it’s dangerous to make a demand prediction on just a weather forecast. I wonder if they like to error on the side of bearish forecasts because they represent consuming nations and a report that might make oil prices rise might not make their bosses too happy.

Fox News and the AP report that ratings agency Standard & Poor’s says Venezuela has defaulted on its debt after it failed to make payments due on some of its bonds. The agency said Tuesday it was downgrading Venezuela’s sovereign debt grade to SD — short for “selective default,” which means the country decided to skip a payment on a specific bond but is overall still committed to honoring its international debts. Previously it had Venezuela in junk bond status. S&P said Venezuela had failed to make $200 million in coupon payments for bonds due 2019 and 2024 within the allowed 30-day grace period. The agency says, “there is a one-in-two chance that Venezuela could default again within the next three months.” There is also a chance that their oil production will continue to fall.

Venezuela’s crude output dipped last month below 2 million barrels per day, its lowest level in 28 years as the Maduro Government steals the wealth from the Venezuelan people. For a country with the largest oil reserves in OPEC to be producing less than 2 million barrels a day in an oil dependent economy is nothing less than reckless disregard and neglect and outright theft by the Venezuelan government. The Venezuelan people deserve better.

We also got the Monthly Shale Production report from the Energy Information Administration. The EIA according to Jones reported that oil production from the U.S.’s main shale regions to rise another 80k bpd in December, to 6.2M bpd, as hydraulic fracturing and horizontal drilling, common in those areas, continue to make up a larger portion of overall U.S. output of 9.2M bpd. The monthly Drilling Productivity Report also says drilled-but-uncompleted wells, or DUC’s, rose again in the shale regions to 7,342 wells last month, from 7,204 in September. Many analysts had expected those DUC inventories to start falling by now, but low oil prices all summer long may have forced producers to hold off on bringing wells to the production stage according to Dow Jones.

The DUCs are not going down because many shale producers are not making money and it is hard to get a frac crew. DUCs will continue to rise until oil is firmly above $60 a barrel. In the meantime, most of the bearish oil arguments are falling apart. Oil is overbought but hanging near a two-year high. RBOB futures fell weighing on the complex.

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