COM - OPEC Vs. IEA: Which Will Have The More Accurate Demand Forecast?

2023-11-02 09:58:15 ET

Summary

• OPEC and the IEA have contradictory views on future oil demand, with the IEA predicting a decline in demand starting in 2030.
• The IEA has reduced its oil demand projections for 2024 due to a weakening economy and increased electric vehicle sales.
• OPEC is sticking to its demand projections for 2024 thanks to strong demand in China, and is also increasing its long-term demand expectations.

IEA vs OPEC: Who's Telling The Truth

In the world of oil and gas, there are two very contradictory views of oil demand from two very important and influential organizations. Those organizations are OPEC (Organization of the Petroleum Exporting Countries) and the IEA (International Energy Agency). It is estimated that OPEC countries contain 80% of the world's oil reserves. This may seem alarming to some, but keep in mind that Venezuela alone contains 24% of the world's reserves, which remains within the Western Hemisphere's "sphere of influence."

The IEA currently believes that the demand for fossil fuels will reach a peak in 2030 and begin declining thereafter. The IEA also claims that as of 2023, we are entering the beginning of the end for the fossil fuel industry including oil, coal, and gas.

According to an October 2023 report , the IEA's expectations for oil, they expect oil demand to increase by 880,000 barrels per day in 2024 compared to their previous expectations of one million barrels per day. That's a reduction in expectations of over 10% which they attribute to an expected weakening economy and greater electric vehicle sales.

While the IEA is reducing their oil demand projections for next year, OPEC is sticking to their demand projections. They recently affirmed their global growth projections where they expect it will increase by 2.25 million barrels per day in 2024 to a total daily demand of 104 million barrels per day. They cite remaining firm in their expectations due to the strong demand growth they expect to continue in China.

OPEC is also increasing their long-term expectations as they expect global demand to reach 116 million barrels per day (bpd) by 2045 from where it was at just 99.6 million bpd in 2022. OPEC also raised its forecast for oil demand in 2027 up to 109 million barrels per day from its estimate in 2022 of 106.9 million barrels per day.

It is clear that OPEC and the IEA's vision of the future of oil demand is diverging. One is expecting oil demand to grow and the other does not. Let's look at their past track records to see which one has more accurately forecast in the past.

Examining Their Track Record

In 2021, the IEA stated that they expected global oil demand to rise by 5.5 million b/d in 2021 and by 3.3 million barrels per day in 2022 bringing it to a total by the end of 2022 of 99.7 million barrels per day. Low and behold, the actual daily demand at the end of 2022 was 99.57 according to Statista and other sources. In 2022, IEA expected oil demand to reach 101.6 million barrels per day as well.

In the middle of 2021, OPEC also predicted that 2022 global oil demand would increase by 3.3 million barrels per day, right in line with the IEA's predictions. Also in 2021, OPEC predicted that in 2023, oil production would increase by 1.7 million barrels per day to roughly 101.6 million barrels per day.

So it seems that with the past two years as our witness, this divergence between the IEA and OPEC has been uncommon. Perhaps this highlights the growing divide between the west and the east or maybe it's just as simple as a disagreement in projections. As the numbers come in, it will be interesting if one party admits being wrong, or if they both come up with different oil demand numbers after 2024 has passed.. . both claiming to be correct. I'd like to think this is just a simple difference in view, but given everything happening in the world, I think this might be a more significant signal of the times we are living in.

What Is the EIA Projecting?

Perhaps by examining projected demand from the EIA, we can get a view from a third party. Of course, the EIA is not more of a neutral third party than the IEA and OPEC. Regardless, it is interesting to get another perspective.

The EIA is projecting daily global oil demand in 2024 to be 102.24 barrels of oil. This is more in line with the IEA rather than OPEC which is not all that surprising.

American Exports Are Growing

In 2023, American oil exports remained strong, increasing from averaging 3.53 million barrels per day in 2022 to 4.08 million barrels per day in 2023. This is according to the Energy Information Association and its an increase of over 500,000 barrels per day. If you are confused by America exporting oil, this maybe be a helpful article to explain why America both exports and imports oil .

Crude output in the U.S. has risen by 1.01 million bpd to 12.92 million bpd over the course of 2023, and is expected to rise by another 200,000 bpd to 13.12 million bpd by the middle of 2024, the EIA shared in this article .

Venezuela Opens Up

In October, the Biden Administration lifted sanctions on Venezuela allowing it to produce and export oil unhindered by any sanctioned limit. This is going to have an interesting effect on oil markets in the coming six months and perhaps longer. Clearly, this should keep oil prices under control for the foreseeable future and it further raises the question of which organization, the IEA or OPEC, is likely correct in their oil demand projections.

Examining Possible Motives

The IEA is of course an international agency, however, it is headquartered in Paris. Its founding members include Austria, Belgium, Canada, Denmark, Germany, Ireland, Italy, Japan, Luxembourg, The Netherlands, Norway, Spain, Sweden, Switzerland, Turkey, UK, and the United States. It is well-known that mainland Europe does not contain very much oil and natural gas and that Russia, one of the primary adversaries of the United States and NATO, is awash in oil and natural gas. Could this be a reason for the divergence between OPEC and IEA oil demand estimates?

OPEC on the other hand, contains 80% of the world's oil supplies. Naturally, it would make sense that OPEC nations would want to see oil prices increasing.

There is no conclusive evidence that differing motives between the IEA and OPEC can be attributed for the difference in oil demand expectations. That said, common sense would suggest that one of these organizations is more motivated to keep prices low, while the other organization would be motivated to want to see oil prices rise. If you believe organizations like these are not influenced by their self-interests, then I don't think there's anything I could say to convince you otherwise.

Conclusion

Which one of these demand pictures is more likely correct? In my opinion, I would be more likely to believe the projections put forth by OPEC. However, I'm not going to be able to predict some as big as global oil demand with the same accuracy that these organizations can. That makes my opinion somewhat irrelevant. I think the most interesting thing about these diverging projections is yet to be seen. That is, when 2024 is put into the history books, will they both claim to be correct? Will we have to go forward with these two organizations claiming that different amounts of oil are being demanded by the world? Or will one concede to being wrong? To me, that is the most interesting thing to watch from this news of differing projections.

A close second is each organizations long-term projections. Paris is going to be more interested in reaching a self-imposed global carbon emissions goal to satisfy the climate change crowd while OPEC isn't likely going to pay attention to climate change politics.

Yet a third consideration is that the IEA is correct in its expectations for a global slowdown in 2024 as being the cause of lessening oil demand. Regardless, 2024 is going to be quite the year for obvious reasons. Let's sit back and see what happens.

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