The Phil Flynn Energy Report
When IEA Is Smiling
When IEA is smiling! Sure 'tis like a morn in Spring, in the lilt of market forecasts, it can make the oil swing! When IEA is bullish, all the world seems bright and gay, but when IEA is bearish, sure they'll take your oil rally away.
The International Energy Agency (IEA) thwarted an overnight American Petroleum Institute (API) report rally with a bunch of blarney and malarkey about oil demand. The IEA has declared that a “supercycle” in oil demand is unlikely while also admitting that the agency had underestimated demand in their last report. In fact the IEA’s had a long track record of underestimating demand.
They also say that oil demand may not return to pre-pandemic levels for 2 years and warned that some of the Covid-19 oil demand destruction may be permanent.
Yet on the more bullish side of the IEA mouth, they did report that global oil supplies fell by 2 million barrels per day (bpd) as Saudi production cuts and the cold snap in Texas reduced supply.
They also acknowledged that global oil stocks fell by 14.2 million barrels to 3.023 million barrels, putting the global supply just 63 million barrels above the 5-year average. That may be the best we see for a while, as that deficit will melt away… just like your heart when Irish eyes are smiling!
The IEA has agreed with what we’ve been saying for months: that improving demand and OPEC+ cuts will lead to huge oil stock drawdowns in the coming months, especially in the 2nd half of the year. Still, they seem to have a problem with what we and many others are saying— that we’re in a new “supercycle” for oil— and also raise doubts about “peak" oil demand anytime in the near future.
"Oil's sharp rally to near $70 a barrel has spurred talk of a new supercycle and a looming supply shortfall. Our data and analysis suggest otherwise," the IEA said in its monthly report. "For a start, oil inventories still look ample compared with historical levels despite a steady decline....On top of the stock cushion, a hefty amount of spare production capacity has built up as a result of OPEC+ supply curbs," it said.
Of course, you must remember that the IEA totally missed the last supercycle in oil back in the early 2000’s, making basically the same arguments.
They also admit that upstream investment dropped by 30% last year compared with 2019. This year, the IEA expects it to increase "only marginally." Argus reports that the IEA report sees the world's production capacity increasing by 5 million bpd by 2026, compared with 2020. But "the historic collapse in demand has resulted in a spare production capacity cushion of a record [9 million bpd] that could keep global markets comfortable in the near term."
Wishful thinking. The IEA also said that, "To meet the growth in oil demand to 2026 in the IEA report's base case, supply needs to rise by [10 million bpd] by 2026. The Middle East, led by Saudi Arabia, is expected to provide half that increase, largely from existing shut-in capacity."
Oil prices are also getting some resistance from more reports of Iran and China thumbing their nose at the Biden administration, openly ignoring sanctions on oil. There is some talk about that creating an issue for OPEC+. Yet, today it's really about Energy Information Administration data and the Fed.
If the Fed gives us what we expect will be a dovish outlook, oil will bounce. The IEA selloff should be short-lived because the IEA usually turns out to be wrong on their big-picture calls. That said, they still move the market for hours, sometimes even days.
The Energy Information Administration will move on refinery runs and gas demand! We know that prices at the pump have been rising, but they may ease off before rising again for summer.
So, may the road rise up to meet you. May the wind be always at your back. May the sun shine warm upon your face, and rains fall soft upon your fields. And until we meet again, may God hold you in the palm of His hand. Happy Saint Patrick’s Day!
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