EIA And Forecastsvalueplays
I love the EIA for the data it provides but I have found them woefully inadequate when it comes to their forecasting and am of the opinion political forces influence them. In just January, literally, one month ago to the day, the EIA was predicting a crude large surplus for 2022 and is already backing off that. They are not backing off a little, it is a significant revision.
News reports the EIA is backing away from an earlier forecast of a crude surplus in 2022. This reinforces a building theme of supply deficit in the near an likely longer term i.e. 1yr and out to 2yrs-3yrs, with current lack of equipment capacity and trained labor.
The International Energy Agency “IEA”, OPEC, and the US Department of Energy have been aligned in forecasting oil surpluses for the duration of 2022 and beyond. The market has taken a different view in recent months, with rapid inventory declines leading prices to multi-year highs. Early Friday, a revised report from the IEA suggests the Agency is coming around to the market’s view.
The report’s forecast revision, just the revision, lifted demand estimates for 2022 by 800kb/d. With the Agency citing higher petrochemical demand from China and increased consumption in Saudi as the primary reasons for the revision. Post revisions, the IEA sees demand growing 3.2mb/d in 2022.
On the supply side, the IEA discussed at length the potential for OPEC+ to increase supplies. Indicating that if quotas were met, the group could add 4.3mb/d to the market this year. As to why the group has been unwilling or unable to meet self-imposed quotas, the IEA provides little insight. Importantly, the Agency sees US supplies growing by 1.2mb/d in 2022; Conoco’s (NYSE:COP) CEO sees 800-900kb/d of growth, while the Citi strategist advising clients to short oil sees 1.0mb/d of supply growth this year.
Just as important as the supply/demand forecast is the IEA inventory update. The Agency is the only source providing a comprehensive view of OECD oil and oil product inventory levels. In December, OECD stocks fell by 60mb. The DOE report showed a 36mb decline in the US over the same period, indicating that record inventory draws are not unique to the US market.
In assessing supply growth, there is a clear divide between those jockeying spreadsheets in Paris and Washington DC, and those buying pipe, hiring crews and producing barrels, like Conoco’s CEO Ryan Lance. Though in assessing real-time inventory reports few disagree that the market is in deficit and in need of additional supplies, and soon.
Higher oil prices, even perhaps a new all-time high are ahead in my opinion accompanied with strong rise in cash flows for energy related cos. It does not stop there as we have seen in the past there are connections throughout the industrial sector spilling over into retail and services that become empowered with rising cash flows in anything as economically vital as oil/gas. This will spark innovation as in past price surges and some entirely new businesses are likely to emerge.
The next 2yrs-3yrs will prove interesting to say the least considering the 7yr drought of CAPEX and a potential 180 degree turn in investor psychology.
In my estimation, the greatest investment returns come from evaluating the factors and degree to which a consensus has been formed distant from the economic reality of any business sector. The snap-back can be intense which is what I think we will see with fossil fuels.