- Inconsistent numbers from various institutions and analysts have been driving volatility in oil markets
- Traders should respond accordingly to their views regarding a prolonged economic recession
- Traders should also consider the likelihood of increased supply from the U.S., Saudi Arabia
Oil prices have been especially volatile lately. On top of several macroeconomic factors, such as recession fears and renewed COVID lockdowns in China, volatility jumped on wildly inconsistent numbers from various institutions and analysts, both on the supply and demand sides.
Here is a look at some of these numbers and how traders should think critically about them:
1. Global Oil Demand Growth
OPEC’s latest Monthly Oil Market Report sees global oil demand growing by 2.7 million bpd to hit 105.4 million bpd by the end of 2023 and an average 102.99 million bpd for the year. This number is higher than the predictions of other organizations.
The EIA, on the other hand, sees global oil demand growing by 2 million bpd to hit just 101.7 million bpd in 2023. The IEA thinks global oil demand will average 101.3 million bpd in 2023.
The differences appear in how the agencies see the global economy performing, the resolution (or not) of geopolitical conflicts, and the containment (or not) of COVID-19 in China.
The OPEC forecast is the product of the professional economists who work for the organization and is not necessarily the same as expected by the officials of OPEC’s member nations. It is based on a more positive outlook for the global economy.
Traders who don’t believe that the global economy is heading for a prolonged recession would be more in line with OPEC’s forecast. In contrast, traders more concerned about a worldwide economic slowdown would consider the IEA forecast more seriously.
2. Saudi Arabia’s Oil Production
As President Biden heads to Saudi Arabia, where he will presumably discuss solutions to sky-high global oil prices, there is a great deal of focus on how much spare capacity Saudi Arabia currently holds.
There is also a great deal of misinformation about this. The New York Times reported that Martin Indyk, a former U.S. diplomat to the Middle East, said that:
“Saudi Arabia is expected to increase production by about 750,000 barrels a day and the United Arab Emirates would follow suit with an additional 500,000 barrels a day, for a combined 1.25 million.”
Assuming a current production level of 10.55 million bpd for Saudi Arabia (according to Platts), this increase could bring the Middle Eastern country’s output to 11.3 million bpd, or 300,000 bpd over Saudi Arabia’s expected August OPEC quota of 11 million bpd.
Such figures would also be higher on a monthly basis than what the country pumped since 2020--except for April 2020, when it pumped 12 million bpd.
Saudi Arabia planned to produce 11 million bpd—in July of 2018. Saudi Arabia can produce as much as 12 million bpd (as I explained here), but doing so would stress its oil reservoirs in undesirable ways, so it is unlikely that the Kingdom would commit to such a significant increase in production.
Some analysts don’t believe Saudi Arabia can produce 11 million or 12 million bpd. This kind of speculation has been going on for decades and is not helpful for traders considering the market.
A better question for traders is whether it is in Saudi Arabia’s interest to increase production to a rate that could potentially hurt its oil reservoirs and whether the Biden administration can offer Saudi Arabia anything that might compel it to take that risk.
3. U.S. Oil Production Growth
Forecasting U.S. production growth for 2022 has proved particularly challenging.
The EIA’s most recent Short-Term Energy Outlook sees U.S. production hitting an average of 12.2 million bpd in H2, an increase of 600,000 bpd from the H1 average. OPEC is more optimistic and sees U.S. production growing by 880,000 bpd in 2022.
U.S. oil producers themselves are also divided on how much they think stateside production will grow. According to the responses of 117 oil and gas firms surveyed by the Federal Reserve Bank of Dallas between June 8 and June 16, 37% expect U.S. production to increase by between 800,000 bpd and 1 million bpd. 34% expect production to increase by less than 800,000 bpd, and 19% expect it to grow between 1 million bpd and 1.2 million bpd.
These firms, the majority of which operate in the Permian and Eagle Ford basins, have been struck by supply chain dislocations and labor shortages. Such difficulties are likely impacting their production expectations.
Oil and gas firms surveyed by the Federal Reserve Bank of Kansas, which includes Wyoming, Colorado, and Oklahoma, have not been impacted as much by supply chain and labor issues as those in Texas. Permian producers’ forecasts may be overly influenced by those issues and could slightly underestimate production growth.
Likewise, traders should consider that OPEC, which underestimated shale oil production growth in previous years, may be wary of the U.S. shale industry’s capacity to produce and is overestimating U.S. production growth now.
Disclosure: The writer does not have any positions in the securities mentioned in this article.