Events force IEA to recalibrate oil assessment methods

The International Energy Agency says game changing events including sovereign debt issues, China’s oil demand and the BP Gulf of Mexico oil spill have forced it to revise the way it assesses oil markets

The International Energy Agency (IEA) has revealed in its Oil Market Monthly report that it is forced to revise the way it analyses oil market-related forecasts and risk assessments as “game changing” market issues and trends have overturned traditional drivers.
   
“Unforeseen events and market trends repeatedly arise to recalibrate the way we look at the oil market,” says the Paris-based agency in its monthly report. “Conventional wisdom, assuming that market drivers will be the same in future as in the past, repeatedly gets overturned. The problem lies in distinguishing real ‘game‐changers’ from isolated, albeit momentous, events which may subsequently prove to have more limited impact.”

While traditional oil market drivers tended to be pegged on the correlation between the US dollar and supply/demand fundamentals, the agency says that the threat to global economic recovery from Organization for Economic Cooperation and Development (OECD) sovereign debt issues and the sustainability of Chinese oil demand growth will impact oil outlooks for the short to medium term.

For the imminent medium-term outlook, the IEA says it “will again run two GDP scenarios which, although not specific to sovereign debt issues, acknowledge uncertainties over the path of future growth.”

“Two very different oil market balances arise, depending on assumed GDP growth and offsetting differences in the impetus to improve oil use efficiency. But a common thread is the strength of non‐OECD demand and the predominance of China,” the agency adds.

While China is currently seen generating 40% of 2010 incremental demand, standing at now +1.7 million barrels per day (b/d) and nearly 45% of 2010–2015 growth, the agency warns that “markets are inter‐related, so any slow‐down in the OECD could curb export‐driven Chinese oil demand growth in future.”

Global oil demand remains estimated at 84.8 million b/d in 2009 and 86.4 million b/d in 2010. This adjustment results largely from stronger‐than‐expected preliminary data in the OECD, while non‐OECD demand looks slightly weaker.

Meanwhile, the agency also revealed that the ongoing crisis, in the form of BP’s Gulf of Mexico oil spill, may also prove to be a supply-side game changer.

“Analysts and journalists have rushed to provide estimates of how much deepwater supply is at risk, even before exact causes and proposed remedies are clear,” says the IEA. “Our own tentative view is up to 300,000 b/d by 2015. The longer‐lasting impact of Deepwater Horizon on US oil supplies may depend on whether operational negligence on the part of companies or regulators, or rather shortcomings in current operating procedures and regulatory structures, were the key cause. The former might suggest a less profound impact on future oil supply than the latter.”