The IEA understates demand on average by about 700 MBOPD
The International Energy Agency’s (IEA) Oil Monthly Report (OMR) tracks the changes in the international oil and gas industry, following supply, demand and inventories, among many other things. Part of the agency’s data includes an item called “miscellaneous to balance,” (MTB) often called “the missing barrels,” which it uses to balance changes in global oil supply and demand when they do not add up to measured changes in inventories.
A recent note from Marshall Adkins at Raymond James explains that the MTB number is used when 1) supply is overstated, 2) demand is understated, 3) inventories are understated, or 4) any combination of the previous three results in an imbalance. In the IEA’s OMRs, the most frequently revised factor tracked by the agency is demand.
These missing barrels hit highs not seen since 1998 in the most recent OMR, totaling 1.2 MMBOPD of production imbalances in the IEA’s numbers.
Upward Demand Revisions the Norm
On average, the IEA revises demand up by 700 MBOPD as it gains more accurate information on supply, demand and inventories. Using this number as a likely benchmark for revisions to the IEA’s most recent OMR, Adkins believes that understated demand, in addition to Chinese storage and barrels being held in floating storage, make up most of the IEA’s missing barrels.
Adkins explains, “Given the lack of official disclosures and limited transparency from the Chinese government on SPR (strategic petroleum reserves) and commercial inventories, there clearly is an element of guesswork in demand and inventory estimates. Therefore, it is understandable the IEA’s China demand/inventory numbers are subject to fairly wide revisions.”
Based on the math done by Adkins and others at Raymond James, the analysts believe that about 25%, or 300 MBOPD, of the IEA’s Q1 2015 MTB number can be explained by Chinese storage. Adkins believes that an additional 25% can be explained by producers taking advantage of contango in the futures markets and storing their production on floating storage vessels.
Using both their own numbers and numbers from Bloomberg, Raymond James estimates that roughly 30 to 33 million barrels of crude storage could have been included in the IEA’s plug number, or about 300 MBOPD. Adkins notes that much of this likely unwound in April/May as contango flattened out.
China’s strategic reserves and global storage likely account for half of the IEA’s 1.2 MMBOPD of missing oil in the first quarter of 2015. Given that the agency routinely understates demand by an average of 700 MBOPD, the other half of the MTB number can likely be attributed to demand being higher than the IEA’s initial estimates.