There is a vast discrepancy between estimated global oil inventories and the actual observed levels of global oil stocks.
Estimates from the International Energy Agency (IEA) showed last week that 200 million barrels of oil were unaccounted for based on its inventory calculations and observed global stockpiles.
Per a Bloomberg report, the IEA has calculated that, based on certain supply and demand assumptions, global oil stocks last year should have declined by 400 million barrels. Instead, they declined by 600 million barrels.
A total of 200 million “missing” barrels may be just two days’ worth of global oil consumption, but in terms of OECD stock draws, it is a big deal.
“A retrospective view shows the difficulty over the past two years of reliably analyzing and forecasting supply and demand,” the IEA said as quoted by Bloomberg. “Lessons learned will improve the work in 2022 and allow us to better understand our market.”
So, where did those barrels go? No one has lost them, of course, and they have not been displaced, either.
Most likely, the “missing” 200 million barrels were the result of the agency’s overestimated global oil supply, underestimated demand, or a combination of the two, Julian Lee, an oil strategist for Bloomberg, notes.
The “lost barrels” highlight the fact that the IEA focuses on measuring oil stocks in the OECD, the developed economies, while stockpiles in developing economies are rarely reported regularly. The poster child for this is the world’s largest oil importer, China, where crude and refined product inventories often remain a mystery since the authorities do not report their levels. How much crude and products China has stashed or is stashing is often subject to speculation and is based on satellite imaging data for on-the-ground observable storage tanks.
The OECD stock assessments by the IEA are also observed via aerial surveys, but the agency primarily uses the developed nations’ stockpiles as the main yardstick for global inventories. This suggests that at times of major disruptions to world oil supply and demand—as in the past two years—the IEA, and all other forecasters for that matter, face major challenges to assess oil market balances.
The IEA admitted as much in its Oil Market Report for January last week.
“A growing discrepancy between observed and calculated stock changes suggests demand could be higher or supply lower than reported or assumed,” the agency said.
The underlying assumption behind supply estimates has been that the OPEC+ group has added 400,000 barrels per day (bpd) to its overall supply every month since August 2021.
In reality, OPEC+ has failed so far to meet the 400,000-bpd monthly increase every month since August. The alliance has been undershooting its collective production targets for months and will likely continue to do so in the months ahead, analysts say.
Even OPEC officials admit that the OPEC+ group will struggle to increase supply as much as the nameplate monthly increase allows, and prices could spike to $100 a barrel, some officials from OPEC producers have recently told Reuters.
The IEA noted in its January report that global oil supply inched up by just 130,000 bpd in December, to 98.6 million bpd, “as outages in Libya and Ecuador and a smaller than scheduled increase from OPEC+ wiped out much of the expected growth.”
OPEC+ producers delivered total gains of 250,000 bpd last month, well below the allocated amount, and were 790,000 bpd below the group’s target, the agency said.
“This shortfall was mostly due to under-production in Nigeria, Angola and Malaysia, all faced with technical and operational issues. Russia pumped below its quota for the first time since record cuts were enforced,” the IEA noted.
Clearly, supply from the OPEC+ group has been well below the targets, which the IEA and other forecasters had assumed in estimating market balances.
Underestimated Demand Recovery
On the other hand, demand recovery was strong throughout 2021 and has been resilient during the Omicron wave so far, contrary to initial calculations from the IEA and other forecasters that the new COVID variant would disrupt consumption to a greater degree.
Global oil demand increased by 1.1 million bpd to 99 million bpd in the fourth quarter of 2021, defying expectations of a severe hit to consumption due to the Omicron wave, the IEA report showed.
According to the world’s largest oil company and single largest oil exporter, Saudi Arabia’s giant Aramco, global oil demand is “getting very close to pre-pandemic levels,” CEO Amin Nasser said on Monday.
Tighter Market And Higher Oil Prices
The lower-than-expected oil supply—due to OPEC+ failing to deliver and sudden outages in Libya, Ecuador, and Kazakhstan—in addition to the higher-than-forecast oil demand continued to lead to stock draws in November and December, the IEA’s report found, contrary to previous forecasts that inventories in the OECD countries would start to build in Q4 2021.
The continued inventory draws have tightened the market more than expected earlier. Although a surplus is expected this quarter, it would be much smaller than initially forecast, and the likely build of stocks will start from a much lower-than-normal level.
Tighter market balances, coupled with shrinking spare production capacity, have made a growing number of investment banks more bullish on oil. Major Wall Street banks, including Goldman Sachs, Bank of America, JP Morgan, and Morgan Stanley, expect prices to hit $100 a barrel as soon as this year.