When Oil Analysts Capitulate

Fortune favors the bold. But not when price is falling. A cascade of previously bullish oil analysts from Jeff Rubin at CIBC to the team at Goldman Sachs have now backed down, from their Summer forecasts for end-2008, and end-2009 oil prices.

One trigger appears to have been IEA Paris forecasts, released last week. IEA sharply downgraded OECD demand growth, while maintaining previous Asian growth forecasts. The result is an aggregate demand forecast next year, for global demand growth of just a half a percent.

Both IEA Paris and EIA Washington have had a rough time of forecasting this decade, both on demand, and supply. The zeitgeist in global energy circles, so focused on supply in the first half of 2008, has now turned sharply towards demand. Demand, demand, demand is the new rallying cry. Don’t even talk to me about supply, describes the mood. So while capitulation among oil analysts appears to be about price, in fact, the shift is actually about this change of focus, from supply, to demand.

A couple of comments about this. First, OECD demand started shifting as early as 2004, when oil rose above 40.00, and hit a high of 55.00. OECD demand has been quite moderate in the last four years, so there is no high plateau to come down from. Discretionary demand was curtailed, starting earlier in the decade. There simply is not as much fat to cut from OECD demand, as many believe. Equally, demand in Asia has unique characteristics, that also make curtailment in demand, from current levels, more difficult. Asian demand is marked by new users, in vast numbers, using small quantities for the first time. I call this fractional demand, even though there is probably a better term for it. The implication is that Asian demand presents an enormous problem for supply, as it arrives from a very low base, does not ask to use much individually, but does indeed use alot collectively. This is likely why IEA Paris, very dour on OECD demand, maintained their Asian forecast.

But what of supply? Supply was the star earlier this year, for example, with exceptionally well written pieces by Neil King in the Wall Street Journal, discussing the problems of decline rates, high costs, and lower exports from producers. 2008 was the year the media finally got it. (The price advance to 147.00 was surely the prime motivator for editorial attention). The answer is that the supply problem is still with us. The same agencies that are warning on demand, EIA Washington and IEA Paris, continue to churn out เกมยิงปลาสุดมันส์monthly production statistics showing that all the problems of supply, from declines in Mexico to lower exports from OPEC, are still with us. I would remind my readers that global supply has been flat for over three years now. Worse, non-OPEC supply has been flat for six years now. Astonishing. And there are now forecasts for declines in non-OPEC supply, for 2009.

While I can understand the influence the global financial crisis has had upon the oil analyst community, I also think it’s best to now allow oneself to be pushed around too quickly. For example, oil is up nearly 5.00 dollars this morning on global reflationary plans. These high-volatility moves in oil are far less important than the supply trends, which have not changed at all in 2008. And may have worsened. My own forecast remains down, between 90.00 and 110.00 for the next three months. And yes, I am tempted to lower the price band to 80.00, given recent action. But though shalt not capitulate, is the rule. Only a true change in a reading of the structure should alter one’s view.

-Gregor