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Everything That's Wrong About The IEA Oil Market Report

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Includes: BNO, DBO, DTO, OIL, OILK, OILX, OLEM, SCO, UCO, USL, USO
by: HFIR
HFIR
Contrarian, value, long-term horizon, long/short equity
Summary

We have a lot of issues with the IEA's OMR that was released today, but let's just jump straight to the issues we see right off the bat.

Global oil demand revised lower for Q1 2020 by ~1 mb/d from an already steep 1.36 mb/d quarterly demand decline from Q4 2019.

US oil production growth remains steady in Q1 and Q2 of 2020.

Static decline rate profiles in non-OPEC ex-US.

These three points above lead us to believe that IEA's global supply and demand estimates for 2020 are going to be way off. Not only is the non-OPEC supply growth vastly optimistic, but the demand cliff dive is far too pessimistic.

Welcome to the IEA OMR edition of Oil Markets Daily!

We have a lot of issues with the IEA's OMR that was released today, but let's just jump straight to the issues we see right off the bat.

Global oil demand revised lower for Q1 2020 by ~1 mb/d

IEA revised down global oil demand by an additional ~1 mb/d for Q1 2020, which resulted in 2020 oil demand growth being trimmed by ~365k b/d down to just +825k b/d y-o-y for 2020.

What IEA doesn't say in the report is how much the quarterly drop in demand is for Q1 2020. Using 98.8 mb/d, IEA is assuming a ~2.36 mb/d drop quarter over quarter, after already assuming an astronomical 1.36 mb/d drop in Q1 2020. So, following another ~1 mb/d downward revision, IEA is assuming a material drop in demand.

In fact, if you put the science behind the number, the revision comes really only in the form of a drop in February and March. This actually makes the demand drop ~1.5 mb/d rather than the ~1 mb/d IEA is assuming, since January demand was rather steady.

We have a lot of issues with this forecast, because given the seasonal decline in demand between Q4 and Q1 is between ~500k b/d to ~1 mb/d, the IEA demand drop essentially assumes that over 1.5-2 mb/d of the demand decrease is related to the virus. We don't think that's the case, and global inventories will have to prove our point otherwise.

US oil production growth remains steady in Q1 and Q2 of 2020

The second big issue we have with the report is the underlying assumptions on US oil production.

(Source: IEA)

IEA's quarterly US oil production forecasts:

  • Q1 2020 - 12.704 mb/d
  • Q2 2020 - 12.836 mb/d
  • Q3 2020 - 13.054 mb/d

IEA basically has a rather static quarter to quarter jump in US oil production. For Q1, the average will be closer to ~12.6 mb/d, which puts the IEA figure off by ~100k b/d, but there's a ripple effect on production for Q2 and Q3.

(Source: EIA, HFI Research)

Our assumption is that by Q2 2020, US oil production will average closer to ~12.4 mb/d vs. ~12.836 mb/d. This would put the delta combined with the difference in NGL at ~800k b/d for Q2 2020.

This will then have a ripple effect on Q3 2020 assumptions with IEA overestimating US oil production again.

Static decline rate profiles in non-OPEC ex-US

The final issue we have with this report is the static assumptions on production profiles for 2020.

(Source: IEA)

(Source: IEA)

(Source: IEA)

If you look at IEA's total non-OPEC supply growth this year, one-third of it will come from Brazil and Norway. Norway's production profile is expected to remain flat from the exit 2019 levels. This projection appears to take into zero account the existing decline rates in Norway's fields. The decline rate is ~15%, which would make Norway's production at a small gain of ~100k b/d year over year. This type of static production growth assumption is flawed.

In addition, Petrobras (PBR) has already guided to a flat production profile for 2020 because existing decline rates from aging fields total ~200k b/d, or essentially eliminates the entire growth.

So, purely from these two countries alone, we think IEA is already overestimating non-OPEC supply growth by ~500k b/d.

Lastly, countries like Mexico show a flat oil production trajectory in 2020. We don't know if an intern made this and decided to do an Excel drag or whatnot, but Mexico's oil production will likely continue to decline into 2020. Our assumption is that Mexico will be around ~1.85 mb/d, or ~100k b/d lower than IEA's assumption.

Conclusion

These three points above lead us to believe that IEA's global supply and demand estimates for 2020 are going to be way off. Not only is the non-OPEC supply growth vastly optimistic, but the demand cliff dive is far too pessimistic. By April 2020 (when the EIA reports February US oil production), IEA will need to start revising lower US oil production estimates along with Brazil and Norway. Static production growth assumptions will prove to be flawed, since IEA apparently does not take into account the existing basin declines into its assumption.

Disclosure: I am/we are long UWT. 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.