PARIS (ResourceInvestor.com) -- If we ever needed reminding of the problem of making forecasts about crude oil and products we only need think of three tiny letters, I, E and A. The International Energy Agency (IEA), so frowned upon in 2004 and 2005 for failing to foresee the sharp rise in demand, has this week decided that some of its previous predictions were in fact erroneous.
The IEA has decided that non-OPEC output will in fact be some 1.1 million barrels short of what it was previously predicting in 2007. That is a 50% reduction from its previous 2.2 million barrel increase. Now, you might think this is not such a big deal being that we consume around 84.5 million barrels per day. But the IEA only made this forecast last July. It is not like the IEA do not have access to reams of information most mere mortals would love to get their hands on, they have loads of it.
But in 2005 they also predicted a near 2 million barrel increase in non-OPEC output. Then over the course of the year they consistently revised the figure, downwards of course. By the end of 2005 they had decided that rather than 2 million barrels extra per day there was in fact, well, no barrels extra per day.
As if to be rather contrary one must also ask if non-OPEC output is to be so much lower, then how do we account for the increase in Russian supply? The Russians are now probably the world’s largest producer of barrels of oil equivalent running at 9.85 million barrels per day, up 4.3% from the same time last year.
It does appear that Saudi Arabia is sticking, mostly, to the cuts OPEC has stipulated, which makes Russia number one producer on the block at the moment, as it is bound by no such agreement. However one must remember that the lack of complex refining capacity in the world means that the extra crude Saudi had available to the market was usually the crude no one wanted to buy. But still, Russia’s power is increasing. If non-OPEC supply growth is to fall, but Russia’s share is increasing or at least steady, then this only lends power to the mighty fist of Gazprom, sorry, the Kremlin.
In a conflicting signal the mighty ingot of Goldman Sachs has decided to remove itself slightly from the crude oil market, by selling its commodity index to the ratings agency Standard & Poor. This has prompted speculation that the bank sees the oil bull market as a thing of the past. Goldman Sachs say they are merely distancing themselves to avoid accusations of conflict of interest.
Of course it would be churlish to point out that Goldman Sachs are hardly immune from oil market speculation themselves. After all they became famous for analyst Arjun Murti’s `Superspike` report that predicted oil would hit $105 per barrel. Like the IEA, it must be great to have a job where your predictions can be so utterly wrong, yet the comeback is next to nothing. Have another pay rise Mr Murti.
The result of the things we were talking about last week, notably the belligerence of the US government over Iran, has prompted crude to touch $59 on the NYMEX this week. We have also seen the continuation of colder weather in the U.S. and in Europe which has also boosted prices. But this little drive may be cut short by a warmer turn in the weather and by the failure of the U.S. and UK governments to actually start a bombing campaign.
If you follow the market in crude and products this is quite an interesting time. The last quarter of last year saw crude stuck in a very tight range of $55-$60 per barrel. Now we are in a huge range of $49-$70 per barrel and everyone is waiting to see at which point it is going to narrow down again.
So, after pointing out how ridiculous predictions are we say – bombs and wars notwithstanding - the next month will see $55 - $61, the second quarter $54-$58 but with some serious possibility of outright no holds barred volatility. That about covers it.
