Who is hiding all the oil?

Guest blog by SA Shelley: I try to avoid writing about oil too often for three reasons: 1) the oil markets are well observed by more than enough highly paid analysts, 2) the changes in energy technology and distribution are more interesting (and still largely misunderstood by highly paid analysts) and 3) I try to build anticipation for my oil industry supply and demand blog in January of each year. But because of some recent peculiarities that have arisen in the oil markets, a short blog about oil now seems warranted.

Fig. 1 – Proportion of world energy supply provided by fossil fuels (World Bank)

For the past 30 years fossil fuels have provided about 80% of global energy needs (see Fig. 1). Oil and gas constitute about half of that supply, so about 40% of all global energy needs are still provided by oil and gas. Even though there are massive investments in renewable energy, most of these renewable investments are displacing coal while oil and gas are still largely unaffected. One of the big reasons for this is that the oil and gas industry is so large and well established that massive amounts energy can be purchased on the spot markets to provide very large, nearly instantaneous energy supplies. Renewables still don’t have that massive market capacity, but it’s coming, especially in light of the lower cost investment and higher returns available in renewables compared to fossil fuels.

Historically, the oil market has worked in a very basic way:

  1. When oil supply meets demand, prices have been relatively stable
  2. When there has been less oil supply than demand, prices tended to rise
  3. When there has been more oil supply than demand, prices tended to fall.

Sure there were agreements and cartels (pre-OPEC, OPEC and probably post-OPEC) that have been successful to some degree to control prices, but in the long run the oil markets have behaved market-like. But what’s happening now in the world of oil as evidenced by its recent price trajectory (see Fig. 2)?

Fig.2 – Brent crude price for the last 30 days

In March of this year, the IEA released their Oil Forecast during the CERA conference in Houston. The IEA argued then that the bulk of oil supply growth will come from the U.S., followed by a group of five other nations and that supply loss will be mainly from Iran and Venezuela (see Fig. 3).

Fig. 3 – IEA supply growth and loss forecast

In that report, the IEA forecast oil demand growth of 1.2 million bbls / day for 2019, essentially stating that demand is stable and growing modestly.

However, supply has not remained stable. Recent data suggests that supply losses in Iran and Venezuela are much greater than originally thought. Supply loss from Iran onto world markets is actually twice that indicated by the IEA at close to 2 million bbls / day lost instead of 1 million bbls / day.  For Venezuela, it is likely that since March oil supply has fallen by another 1/2 million bbls / day. Between just these two states, since March, it is probable that another 1-1/2 million bbls / day of oil supply has disappeared from the markets. 

So why are oil prices falling again when demand is supposed to be stable, but supply is decreasing (!!!)? Some possible answers:

  1. Oil supply growth is faster than forecast
  2. Oil demand growth is slower than forecast
  3. Both 1) and 2)
  4. Neither 1) nor 2)
  5. Somebody is hiding oil, by under reporting production and/or purchases and by using tankers of dubious flags, or under-scrutinized pipelines

I’m guessing 5). Other overlooked, misunderstood and scary data and analysis from the IEA report will be discussed in the January oil blog.

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