Oil in 2013: aberration or paradigm shift?By Ross McCracken in London August 3, 2012 - Short-term forecasts for the oil market over the next 18 months portray a starkly different picture to the long-term outlook. While some aspects of this variance may be temporary aberrations from trend, others can be put in the context of longer-term developments based on policy direction and technological innovation. It may be time for a reassessment of the oil market's dominant narrative. July saw the arrival not just of the British rainy season, but the first short-term forecasts from the International Energy Agency and OPEC regarding oil demand and supply for the year ahead, published in their monthly oil reports. The US Energy Information Administration started earlier in January. From hereon in, these numbers, despite their uncertainty, play an important role in forming expectations regarding the balance between oil supply and demand, known in market and economic parlance as the 'fundamentals'. These fundamentals have a large bearing on price, but by no means an overriding one. There is a huge amount of literature and debate on the role of fundamentals in price formation, but also little doubt that the oil market is subject to a variety of geopolitical, economic, regulatory, social and technological forces that often have a greater impact than that which might be assumed from the apparent balance between supply and demand. Not least amongst these is the fact that about one third of all crude supply is controlled by OPEC. However, it is clear that the initial forecasts for 2013 jar significantly with the assumptions underlying long-term forecasts. The long-term outlook sees continued strong oil demand from developing economies over the period out to 2030-35, and beyond, based on high GDP growth potential, rises in population, urbanization and increasing levels of income from a low level, a period of development that is particularly oil intensive. In particular, growth in oil demand in the non-OECD is expected to outstrip the opposite trend for contraction in the OECD by an order of some magnitude, creating significant supply-side challenges that support a rising oil price over the long term. On this prognosis, the development of high-cost frontier oil is a sound bet, one that is attracting billions of dollars in investment capital. In addition, the expectation is that OPEC's share of the market will rise as OECD production declines, increasing the insecurity of oil supply in both OECD markets and the major emerging markets such as China and India, providing OPEC with increasing power over pricing. The short-term outlook, by contrast, tells a different story. Reduced demand in the OECD offsets to a greater than expected extent demand growth elsewhere. Combined with strong OECD supply growth -- buoyed by years of high oil prices and technological innovation -- this means that supply growth is greater than overall demand growth. Moreover, the short-term data suggest that non-OECD economic growth is still heavily dependent on the health of the OECD economies, a link which weakens in the context of longer-term outlooks. Furthermore, the Chinese economy -- the main engine of demand growth for oil -- may be experiencing internally-generated problems that will divert it from its current rapid path of economic expansion. This differs from the view that China will gradually shift from export-orientated growth to develop a more balanced internal growth dynamic of its own. This variance between short and long-term forecasts raises the question of whether 2013 represents a blip of uncertain duration from the long-term trend, or the start of a new scenario based on less visible but still identifiable developments. As a result, it may be that a major overhaul of existing assumptions regarding the long-term outlook for oil demand is required. Forecasts for 2013The EIA's July Short-Term Energy Outlook included some major revisions to expected oil demand and supply in 2012 and 2013. The forecast for oil demand growth was lowered by 240,000 b/d for 2012 to 670,000 b/d, leaving total consumption at 88.64 million b/d, and, for 2013, by 670,000 b/d to 730,000 b/d to put total consumption at 89.37 million b/d. The forecast for non-OPEC supply was put at 52.66 million b/d in 2012 and 53.93 million b/d in 2013, representing year-on-year increases of 750,000 b/d and 1.27 million b/d, respectively. For 2012, the balance between non-OPEC supply growth (non-OPEC supply plus OPEC Natural Gas Liquids) and demand growth has shrunk by 60,000 b/d -- supply growth will exceed demand growth by 340,000 b/d, rather than the 400,000 b/d estimated in the June STEO. However, in 2013, that balance has expanded to an excess of 590,000 b/d. This is a big jump compared with the June STEO, which put the figure at 240,000 b/d. Although total supply depends on OPEC, the EIA's new outlook effectively inverts expectations regarding 2012 and 2013. Next year now looks weaker than this year rather than the other way around. It implies that OPEC will have to curtail production significantly to maintain prices and that non-OPEC supply will make inroads into OPEC's share of the oil market globally. OPEC itself makes a similar prognosis: oil demand will grow by 800,000 b/d in contrast to supply growth from non-OPEC and OPEC NGLs combined of 1.2 million b/d. NGLs are light condensates that are not covered by OPEC's production targets, but nonetheless enter the blending pool or displace crude oil products in various industrial applications. Significantly, the 'call on OPEC' -- how much crude the cartel needs to produce to balance supply and demand -- is estimated to average 29.6 million b/d over the course of 2013. According to a Platts survey of OPEC production, the organization was producing 31.72 million b/d in June, way above OPEC's own supposed target of 30 million b/d and the expected call on OPEC in 2012 of an average 29.9 million b/d, based on the organization's own figures. The IEA's numbers diverge significantly from the forecasts of both the EIA and OPEC. First the IEA expects demand growth to be greater in 2013, putting the figure at 1 million b/d. Second, it expects growth in non-OPEC supply to be smaller at 700,000 b/d. Although it gives the highest figure for growth in OPEC NGLs in 2013 at 300,000 b/d, the net effect is to forecast supply growth as exactly in balance with demand growth in both 2012 and 2013. The IEA's call on OPEC is therefore substantially higher than either the EIA or OPEC for 2013 at 30.50 million b/d, above OPEC's nominal 30 million b/d target, but still well below current production. To subscribe or visit go to: http://www.platts.com
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