Musings: Is OPEC Talking Its Book?

For those who don't spend their lives in the stock market, talking one's book refers to money managers, who after buying stocks, give interviews where they talk up the merits of these investments in hopes other investors will follow them and bid up the share prices bolstering the managers' performance. OPEC last week issued its July monthly oil report and predicted that after two years of global oil demand declines, consumption would be higher in 2010.

Based on the recently released economic forecasts from the International Monetary Fund and the World Bank suggesting that global economies will grow more strongly next year than previously believed, OPEC has produced its first 2010 oil market forecast calling for an increase of 500,000 barrels per day (b/d) in demand. This increase follows an estimated demand contraction of 1.6 million b/d in 2009, unchanged in this latest OPEC forecast. Two points in the OPEC forecast stand out. First, the organization suggested that the range of possible forecasts in 2010 is from a gain of 200,000 b/d on the low side to an 800,000 b/d increase on the upside. The difference in the optimistic and pessimistic forecasts is the health of the U.S. economy and gasoline demand. OPEC also cautions about the possibility of a warm winter, which would cut demand. Based on the recent announcement by NOAA of the presence of an El Niño phenomenon that is often associated with milder winters in the northern regions of the United States, winter energy demand in 2009-2010 could be at risk.

The other data point OPEC had in its 2010 forecast is a healthy growth forecast for biofuels. OPEC is predicting growth of 150,000 b/d, which has to come out of the transportation fuels demand. Increased gasoline consumption in the United States next year would imply more ethanol use. With other alternative fuels making inroads into gasoline demand, we suspect this is an area of stealth vulnerability to the demand forecast since these fuels generally fly below the radar screen.

As expected by all forecasters, the strength in oil demand next year will come from non-OECD countries and in particular, China. OPEC sees China accounting for nearly half of the projected demand growth from non-OECD countries. OPEC does caution over the actions the Chinese government is taking to reduce its economy's energy intensity, develop alternative energy sources and its efforts to push the use of more alternative fuel vehicles. These strategies all argue for a moderation in oil demand growth.

It is interesting to compare the oil demand forecasts of the International Energy Agency and OPEC for 2009 and 2010. For this year, the IEA is looking for a fall in global oil demand of 2.5 million b/d compared to OPEC's forecast of a contraction of only 1.6 million b/d. In 2010, both organizations expect oil demand to increase with the IEA looking for growth of 1.4 million b/d while OPEC sees demand up only by 0.5 million b/d. I'm sure OPEC is hoping the IEA forecast comes true as there are positive implications for the call on the cartel's oil output. Under OPEC's forecast, the call on OPEC oil actually falls from 28.5 million b/d this year to 28.1 million b/d next. A decline in 2010 would represent a third straight year of falling OPEC output. If the IEA demand forecast is right, then the call on OPEC oil would rise in 2010. OPEC members are probably keeping their fingers crossed that better times are only a few months away.