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IEA Data Revisions

|Includes: The United States Oil ETF, LP (USO)

Every February the IEA issues its medium-term oil outlook (MTOMR) for the next 5 years, follows is their demand-supply outlook issued in February 2015:

And follows is their demand-supply outlook issued in February 2016:

As can be seen from the above, the 2016 medium term outlook looks more bullish than the 2015 medium term outlook as demand is revised higher, and non-OPEC supply is brought down. Now that we traveled eight months into the future since the last MTOMR was issued, we notice that the IEA has substantially altered the above numbers yet again based on the the latest IEA OMR data which I will compare with the aforementioned 2015/2016 MTMOR data:

2015 Oil Demand estimate:

MTOMR (2015): 93.34m

MTOMR (2016): 94.4m

Oct. OMR: 95m

Revision from 2015 MTOMR vs. latest OMR: +1.66m

Revision from 2016 MTOMR vs. latest OMR: +600K

2016 Oil Demand estimate:

MTMOR (2015): 94.47m

MTOMR (2016): 95.6m

Oct. OMR: 96.3m

Revision from 2015 MTOMR vs. latest OMR: +1.83

Revision from 2016 MTOMR vs. latest OMR: +700K

2017 Oil Demand estimate :

MTMOR (2015): 95.68m

MTOMR (2016): 96.9m

Oct. OMR: 97.5m

Revision from 2015 MTOMR vs. latest OMR: +1.82m

Revision from 2016 MTOMR vs. latest OMR: +600K

2015 Non-OPEC supply:

MTMOR (2015): 57.32m

MTOMR (2016): 57.7m

Oct. OMR: 57.6m

Revision from 2015 MTOMR vs. latest OMR: +280K

Revision from 2016 MTOMR vs. latest OMR: -100K

2016 Non-OPEC Supply:

MTMOR (2015): 57.78m

MTOMR (2016): 57.1m

Oct. OMR: 56.6m

Revision from 2015 MTOMR vs. latest OMR: -1.18m

Revision from 2016 MTOMR vs. latest OMR: -500K

2017 Non-OPEC Supply:

MTMOR (2015): 58.26m

MTOMR (2016): 57m

Oct. OMR: 57m

Revision from 2015 MTOMR vs. latest OMR: -1.26m

Revision from 2016 MTOMR vs. latest OMR: unchanged.

It is truly amazing to see that the 2016 demand numbers have been revised up by 700K since February (and by over 1.8m since the 2015 MTOMR), while non-OPEC supply has been revised down by 500K in the last eight months (and by 1.18m since the 2015 MTOMR). To put this in prospective the total demand-supply combined adjustment by the IEA for 2016 since they issued their 2015 medium term outlook in February 2015 is a massive 2.98m barrels, and is 1.2m barrels since they issued their latest medium term outlook in February 2016. This is a major about face that I never see mentioned in the media.

I find the lack of coverage on the change in demand estimates particularly interesting, and the reason for that is simple, much of that upward revision in demand is being masked by the IEA quietly upping its baseline demand numbers. When this oil crises started the IEA was explicit that 2014 demand growth was anemic as highlighted in their 09/2014 IEA OMR:

2013 oil demand: 91.7m

2014 oil demand: 92.6m

Growth: +900K

Growth rate: 0.098%

However, by looking at the latest IEA OMR, we notice that the 2013/2014 numbers have been revised to the following:

2013 oil demand: 92m

2014 oil demand: 93.2m

Growth: 1.2m

Growth rate: 1.3%

As we can see from the above 2014 oil demand estimates have increased from 92.6m in Sept. 2014 to 93.2m today or an increase of 600K barrels. This means the IEA has both underestimated the rate of demand growth in 2014 and the absolute level of demand, which in turn means demand has absolutely nothing to do with this oil collapse. I'm yet to see the press catch up with that one.

What saved the IEA from the embarrassment of crying wolf about a never-ending oil glut is the more than expected increase in OPEC's oil supply. Here is the comparison between OPEC MTMOR estimates and actual and estimated OPEC numbers for 2015 and 2016.

2015 OPEC crude + NGLs estimates:

Feb. 2016 MTMOR: 38.7m

Oct. OMR: 39m

Revision: +300K

2016 OPEC crude + NGLs estimates:

Feb. 2016 MTMOR: 39.7m

Oct. OMR: 40.2m* (Q4 is estimated at 40.6m).

Revision: +500K

Nonetheless, despite the increase in OPEC supply in 2015 and 2016, the extent of the 2016 glut predicted by the IEA as recently as February has shrunk substantially from 1.1m for the year (2016 MTOMR) to 560K based on the latest IEA data for the first three quarters of the year, and if inventories actually withdraw in 2016, the imbalance for the year will likely dip below 400K.

Now looking into 2017, the IEA is placing a 33.4m call on OPEC crude, but considering the IEA tendency to underestimate demand it is very likely that 2017 baseline demand will come in higher than what they are currently estimating, and non-OPEC supply is again likely to come in weaker then they estimate as $50 oil starts to hit long term supply. Having said that, if we were to take the IEA 2017 estimates at face value. A cut by OPEC to 33m in 2017 will remove close to 150m barrels from inventories or half the current excess in storage. This should be sufficient to bring prices to the $60+ range in early-spring 2017. Meanwhile, if OPEC does cut to 33m and demand comes in stronger than the IEA estimate, or non-OPEC supply comes in weaker (or both), inventories could drain much faster, and the storage excess in terms of days of supply could clear by Q3 or Q4 2017, and this could lead to a violent jump in prices.

If the revisions in the IEA data is any indication, the combined demand-supply balance in 2017 is possibly being underestimated by as much as 1m barrels, which in turn means the call on OPEC in 2017 could be 34.3m instead of the projected 33.4m. Hence, If OPEC was to cut down to 33m, inventory may withdraw at a rate of 1.4m in 2017, this would lead to the totality of the excess inventory to draw in 7 months.

I know many are expecting shale to stall the balancing the process if prices rise too fast, however for that to happen the rig count needs to rise between 900 and 1200 and this will take time and money, and this is even if we account for 250K barrels coming from DUCs, by the time US shale comes into play in size (500K yearly growth) the glut would have cleared, and the game will change to finding the new equilibrium price level. I do believe this level will be much higher than $50, since the sizable increase in geopolitically constrained oil from the likes of Iraq and Iran, which kept prices lower, is unlikely to repeat to the same extent going forward. By 2018, assuming no shortage (a big if) from the massive capex cuts undertaken in 2015 and 2016, the oil market demand growth of 1m+ will likely be shared roughly 50/50 between OPEC and non-OPEC, with the majority of non-OPEC coming from shale/tight oil resources.