Calling OPEC: The IEA's crude production forecasting dilemma

Since its creation more than 40 years ago, the International Energy Agency has side-stepped predictions of OPEC crude production, acutely aware that the producer group's output quotas made the job at best tricky, at worst politically inexpedient. But this may be about to change.

Next month, the IEA is considering publishing "scenario" forecasts of OPEC crude production for the first time in a move likely to be seen as a nod to the cartel's radical new free-wheeling output policy.

The IEA, set up in response to the 1973 oil shock, is also rethinking longstanding, and much-cited, forecasts for the expected demand for OPEC's crude.

From next month, the IEA's closely-watched monthly Oil Market Report could contain a scenario for OPEC crude output through to the end of 2017, Neil Atkinson, head of the IEA's oil market division, told Platts.

The change is being considered amid growing evidence that OPEC's Saudi-led abdication of its traditional supply management role since late 2014 has become the "new normal" for the producer group. With OPEC producers essentially pumping flat out to maximize market share over prices, the job of forecasting OPEC production has apparently become less precarious.

Indeed, since the oil price downturn of late 2014, the IEA has already broken with protocol giving some tentative predictions of OPEC's future oil production for the purposes of mapping the potential timing of a return to market balance.

In its latest monthly report, the IEA predicted OPEC's crude production would rise to average 33.15 million b/d in the second half of 2016, a gain of 600,000 b/d from the first quarter and 1.1 million b/d higher than OPEC's average crude output last year. Driven by rising exports from a post-sanctions Iran, OPEC's output creep is part of the reason why the global supply glut will linger into 2017, the IEA believes.

Role of shale

A move by the Paris-based agency to provide soft forecasts on OPEC production would also bring it in line with the US' Energy Information Administration. The EIA's monthly Short Term Energy Outlook covers similar ground on forecasting global oil balances but includes estimates for OPEC crude output.

OPEC's ability to balance the global oil markets in the wake of the US shale boom has not gone unnoticed, least of all by OPEC itself. With the US' huge reserves of unconventional — but no less reliable — light, tight oil, OPEC is no longer the world's swing producer, many now believe.

Internal divisions over OPEC's role of managing supply to support prices are also growing. Earlier this month Russia's most powerful oil executive Igor Sechin said OPEC "has practically stopped existing as a united organization."

In October, BP's chief economist Spencer Dale referred to shale as a "shock absorber" for the global oil market due to the short lead times and manufacturing-like supply response of the US shale industry. Shale, he argued, has essentially put a ceiling on oil prices and will dampen future price volatility as light-footed US shale producers quickly react to price signals.

Call on OPEC

The idea that OPEC — or Saudi Arabia — was able and willing to use its spare production capacity to balance global demand and prop up prices has dominated market behavior for years.

That changed after OPEC's historic November 2014 ministerial meeting when price support was replaced by the maintenance of market share as the key policy objective. OPEC's new policy raises questions over the relevance of the concept of the so-called "call on OPEC crude," essentially a balancing item plotting the mathematical difference between global oil demand versus total non-OPEC supply and OPEC NGLs.

A long-running data point used by market watchers to gauge the divergence of actual OPEC output to estimated market needs, the IEA has not referred to the "call" in its market commentaries since the start of the year.

The IEA is now considering dropping or renaming the "call on OPEC" as a result of OPEC's new tack, Atkinson said.

Other oil market forecasters already use more neutral wording for the balancing item. OPEC's own monthly oil market report calculates a "differential" between demand and supply while the EIA refers to a "total stock draw" or an "implied stock balance."

The rationale for the "call" has also been diluted as most OPEC members are pumping flat out, and some believe that Saudi Arabia's spare capacity has dipped from historical levels of around 2 million b/d.

Whatever the outcome, the IEA's deliberations over how it accounts for and presents forecasts for a key part of its global oil market outlook will be lasting legacy of OPEC's new direction.

Noting OPEC's newfound "output maximization strategy" in February this year, the IEA pointed out that 2016 could mark the "first truly free oil market" since the birth of the oil industry.

"In today's oil world, anybody who can produce oil sells as much as possible for whatever price can be achieved. Just a few years ago such a free-for-all would have been unimaginable but today it is the reality and we must get used to it," the IEA said in the preface to its Medium Term Oil Market Outlook.

With ever more of world's oil being pumped from non-conventional, non-OPEC sources, at least in the medium term, the IEA's "call on OPEC" could feasibly be replaced by a "call on shale."