If there’s one thing my readers likely all agree on, it’s that I’m a long-term oil bull. I believe that the picture for higher oil prices is improving and that it’s only a matter of time before a true recovery in this space takes place as strong demand takes hold and restrained output causes the glut to shrink. In recent months, the majority (but not all) of the data out there has pointed toward this happening, but the IEA (International Energy Agency) recently announced a piece of data that even I have a hard time digesting: demand has been stronger than even I expected. In what follows, I will cover their findings and give my thoughts on how this should prove bullish for investors moving forward.
A bold claim
Even as the EIA (Energy Information Administration) recently decreased their demand expectations for oil this year (though supply figures were lowered as well), the IEA has come out and said that demand in 2017 so far has been robust. If their estimates are correct, demand in the second quarter of this year came out to an astounding 2.3 million barrels per day above the say period last year. To put this in perspective, the first quarter (which usually has the weakest figures of the year) posted an increase of nearly 1.2 million barrels per day compared to the first quarter of 2016.
I’m an oil bull and I have maintained for months that the demand picture was better than what the EIA, IEA, and especially OPEC, had said it would be. The rationale on my end has been fairly simple. We have a low-priced energy environment compared to what we saw over most of the past 10 years and with some exceptions (like Venezuela), the state of the global economy appears to be pretty attractive. My one fear, China’s housing bubble, has shown no signs of popping and dating coming from the region has been firming. Meanwhile, toward the middle of last year, the US economy began to show signs of exiting the state of malaise that had hung over its head.
As a result of the strong second-quarter figure, the IEA has revised its expectations for 2017’s demand up to an average of 1.6 million barrels per day. This is similar to what the EIA had expected at some point earlier this year and is well above the weak 1.3 million barrels per day in growth that the IEA had anticipated as recently as May of this year for the whole of 2017. Even though the second-quarter figures were strong, thanks to great performance from the US and Europe, the organization believes that inclement weather, such as hurricanes Harvey and Irma, will harm consumption for the third quarter. Personally, I don’t believe this is likely and the most recent estimates from the EIA seem to indicate that demand is on the rebound (though those figures are likely off). Because of this, I personally believe that demand growth for 2016 will probably be a bit higher, perhaps in the range of 1.7 million to 1.9 million barrels per day, but if the EIA’s revision is based on something I don’t see, then I could be wrong.
Some other positive data for oil bulls
Fortunately, the IEA had more than just demand data to share with us. According to their estimates, the supply picture has, temporarily at least, improved. In the month of August, for instance, global oil supplies fell by an estimated 0.72 million barrels per day. OPEC, which saw its compliance with the OPEC and non-OPEC oil production agreement that was struck last year improve a bit from an estimated 75% a month earlier to 82% in August, saw reduced production for the month of 0.21 million barrels per day. This is great, but if Libya’s oil production really is rebounding, then it will prove short-lived unless the picture worsens elsewhere soon.
As of the time of this writing, data for August when it comes to OECD inventories, has not been released, but estimates for July suggest that stocks stayed flat at 3.016 billion barrels. This is a bummer to be honest, but it should be mentioned that the amount of crude and product stocks that happens to be out there (in OECD nations) is above the five-year average by 190 million barrels per day now, so we are showing some signs of improvement (though we need to see even more). What’s really fascinating about this, though, is that product stocks alone are up by just 35 million barrels, which means that most of the glut among developed countries is in the form of crude still.
What I see moving forward
Honestly, even though the IEA figures have gotten better, and as OPEC has also posted some improvements, the change from the EIA has muddied the waters a bit. This makes it hard to figure out what is going to happen. In essence, either the IEA and OPEC must revise down their demand figures, which would imply a more bearish oil environment, the EIA must revise its figures back up, or a mix of these must transpire. Based on what I’ve seen in the oil space over my time of analyzing it, I believe that the IEA and OPEC will likely be proven more accurate.
What this means is that, if all goes according to plan, the oil market will continue to rebalance over the next few months. You always hear about how the end of summer driving season is always bad, but when you talk about global demand trends, there’s no denying that the third quarter of every year is almost always the strongest, followed usually by the fourth quarter (sometimes they flip places when it comes to demand). When you add this fact to the explicit goal set by OPEC and some non-OPEC nations to bring the market to balance, not to mention the progress that has been seen already, it’s probable that the bulls will prevail.
Based on the data provided, it seems to me as though the oil picture continues to get better if what the IEA says is accurate. I still have a hard time digesting their second-quarter demand figures, but I do believe that their decision to raise expectations for this year was a good one. Of course, some risks do still exist, but we will have to watch how things progress over time to see if the fears come to realization.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.