Why Oil Demand May Be Higher Than Expected

Oil Dow Jones Newswires

(AP)

Investors fretting about too much oil supply may get some cheer from demand, or at least the statistics that consistently underestimate it.

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The International Energy Agency's closely watched annual estimates of global crude demand have been revised up for the past seven years by an average of 880,000 barrels a day, according to a Wall Street Journal analysis.

Investors and analysts believe that the IEA will have also underestimated demand this year, suggesting that more oil is being bought than the market currently believes.

"In recent years, we've seen oil demand being constantly revised higher and by the looks of it this year shouldn't be any different," said Rob Thummel, portfolio manager at Tortoise Capital Advisors, which manages $17 billion in energy assets. "This is a clear positive for oil prices."

U.S. oil prices last week fell around 9% on data that showed American inventories were still rising.

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The history of discrepancies underscores how oil markets often trade on incomplete data.

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The demand revisions have amounted, on average, to less than 1% of a giant market in which about 97 million barrels of oil are sold daily.

But the difference, if repeated this year, is important. The oversupply that has pressured oil prices for almost three years was estimated at around 1% to 2% of the market in 2016.

To be sure, the IEA may get its prediction right this year, and others release demand predictions that are used by investors. Still, there is little evidence that those other forecasts are more accurate. The U.S. Energy Information Administration's forecasts have underestimated consumption over the past seven years, with the annual figures being revised up by an average of 2.3 million barrels a day, according to an analysis by The Wall Street Journal. A spokesman for the agency said the underestimation is due to lags in historical data and the lack of data from some countries, among other reasons.

The IEA's data, though, is the most closely watched and is often used by oil analysts in their own reports.

The agency estimates global oil demand based on data and statistical models. It then revises the statistics in monthly reports as more data become available. The Journal compared the IEA's predictions for annual demand made in January of each of the past seven years with latest available estimates for those years. Looking at predictions made in March and September over the seven years painted a similar picture of consistent underestimates.

Revisions of oil supply estimates are typically much smaller than for demand -- and are often about correcting overestimates for crude production. The IEA's supply data has been revised down 60,000 barrels a day on average over the last seven years, according to the Journal analysis. That means the oversupply usually ends up being smaller than initially thought, another positive for those wanting higher oil prices.

Matt Parry, a senior oil market analyst at the IEA, said that demand is harder to estimate than supply.

It involves "billions of consumers world-wide and many millions of companies of all sizes, whereas supply can be estimated from the pre-announced expansion plans of a much, much smaller number of companies," he said.

"Our accuracy has improved recently but there are so many moving parts in the market," he added.

The IEA has already raised its 2017 demand forecast once this year, by 200,000 barrels a day. But going by past examples -- and with an upturn in global growth -- the number could still be increased substantially, analysts said.

"Continued upgrades to historic demand figures are particularly frustrating," analysts at Swiss bank UBS wrote in a recent report. The bank estimates that for 31 of the past 35 quarters, IEA data revisions have shown a tighter oil market than it initially estimated.

UBS believes that demand is also harder to pin down because around half of global oil consumption now comes from countries outside the Organization for Economic Cooperation and Development, where statistical gathering isn't well developed. The U.S., an OECD member state and the world's biggest crude consumer, produces weekly demand estimates -- and they are often later revised.

Data revisions don't just happen in the oil market. A lot of official economic statistics are subject to regular changes as more data become available. The U.S. gross domestic product, for example, is often revised in updates.

But data revisions are particularly important for the oil industry now, given that the market appears finally on the verge of sapping its persistent glut.

The Organization of the Petroleum Exporting Countries and big producers such as Russia agreed in December to reduce their production in a bid to drain storage tanks around the world and push the oil price higher.

While most market participants are currently focused on supply changes -- from OPEC output cuts to U.S. shale growth -- they should also look for changes in demand.

"If the market players become more aware of the strong demand-numbers and the constant upward revisions to demand, it could be very supportive to prices," said Torbjorn Kjus, oil analyst at Norway-based DNB Bank.

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