Over the past few months, oil prices have risen from below $27 per barrel and are now hovering in the range of $44 to $52 per barrel (on the lower end as of the time of this writing). While the supply situation has shown signs of improvement, thanks to falling U.S. and some other non-OPEC production due to a lack of investment and thanks to miscellaneous supply outages around the globe, a big contributor to this move higher has also been revised demand data.
In what follows, I will dig into the data and show how demand forecasts continue to change and what it will likely mean for investors in companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs.
Where I'm getting my data from
There are three primary sources I rely on for my supply and demand data. The first is the EIA (Energy Information Administration), which is the U.S. government's energy arm for collecting and disseminating data. The second is OPEC, which is a group comprised of some of the largest oil producers in the world, such as Saudi Arabia, Iran, Iraq, and Venezuela. The final one is the IEA (International Energy Agency), a group that looks over the global energy market and provides data on it.
Global growth forecasts have been quite bumpy
In the graph below, you can see how the global demand growth expectations have changed for each of these three parties, on a monthly basis, over the course of this year. The data covers reports released from January through July of this year and are simply a measure of how much extra oil should be consumed this year compared to last year. Based on the findings, it's clear that the road has been quite bumpy and, in some cases, even bearish.
You see, if you look at the EIA, you can see that growth demand forecasts for 2016 compared to 2015 started out pretty strong in January at 1.42 million barrels per day before falling over the next to months to as low as 1.15 million barrels per day, driven in large part by fears of a global economic slowdown. However, starting in April, demand forecasts started to improve and by June hit a high this year of 1.45 million barrels per day. In July, demand forecasts dropped to 1.44 million, thanks to fears associated with Brexit but also due to an upward revision in last year's data of 40 thousand barrels per day. Keeping 2015's demand flat from June's report would have actually led to a year-over-year growth for July's report of 1.48 million barrels per day, an increase over the prior month's period.
The IEA's path is much more clear. In the graph, you can see that, after staying flat at 1.20 million barrels per day from January through March, we began seeing increases in expectations, rising 1.30 million barrels per day in June and up to nearly 1.40 million barrels per day in July. Meanwhile, OPEC has actually posted negative demand revisions, bringing demand growth down from 1.25 million barrels per day to just 1.20 million barrels per day.
Adjusting for prior revisions
Looking at the data above, it may seem as though nobody really knows what to think of global demand growth this year. The EIA has been all over the place but has been generally higher since March, while the IEA has only recently (but in a fairly decent way) moved their expectations from lower to higher, and OPEC has actually been bearish in its forecasts. This generates a good deal of uncertainty into the market but we need to be cognizant of the fact that there are two ways to reflect demand expectations. The first is to just look at the growth in demand over last year's without taking into account changes in 2015's estimates on a month-to-month basis and the second is to hold flat the demand forecasts from last year and look at each month's 2016 forecasts compared to the flat base.
In the data above, I followed the first method, but this can be easily manipulated. Take, for instance, the IEA. In January, the agency said that demand for 2016 would average 95.7 million barrels per day, an increase of just 1.2 million barrels per day over 2015, implying 2015 demand data of only 94.5 million barrels per day. Today, however, they are calling for 2016 demand to average 96 million barrels per day, an increase over last year (using their revised estimate for last year's demand) of 1.4 million barrels per day.
This suggests 2015's demand has been revised, during the year, by 100 thousand barrels per day from 94.5 million to 94.6 million. So, if a party wanted to make demand growth look weak this year for any particular reason (and I am not making any allegations that this would be intentional), they could increase last year's estimated demand numbers. Sticking true to January's base, demand forecasts this year would now be up not from 1.2 million barrels per day to 1.4 million, but from 1.2 million barrels per day to 1.5 million.
In the graph below, you can see what happens if I adjust the data accordingly, using 2015's estimated demand from that month and apply absolute, instead of relative, demand for each month that follows. Based on the data, what we see is something quite different compared to the prior graph. In this one, you can see that, keeping demand constant in 2015, the EIA's year-over-year increase for 2016 has actually risen from 1.42 million barrels per day to 1.52 million and the IEA's has soared from 1.2 million barrels per day to 1.5 million. Even OPEC, which had previously forecasted demand growth to fall from 1.25 million barrels per day to 1.20 million barrels per day, shows a modest increase from 1.25 million to 1.26 million.
Demand growth forecasts are certainly subject to change but even if we take these numbers into consideration, an important rule is to make sure you put everything into context. While demand forecasts can fall from one month to the next, we need to be aware of the fact that last year's numbers can also be revised by these organizations. It does not mean that they are trying to make demand growth appear weaker intentionally than it otherwise is (though that is a possibility), but it does mean that aggregate demand is being discounted if we don't. At the end of the day, what matters most on the demand side is this aggregate number, not how it is on a relative basis, and this number is only improving (and will probably continue to improve).
Disclosure: I am/we are long AREX, MEMP, LGCY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own LGCYO, not LGCY
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