Freeze Frame - Coronavirus Surge Blurs Global Demand Picture for Crude Oil

This summer’s resurgence of the COVID-19 pandemic in many parts of the world will wreck forecasts of demand for petroleum products and, therefore, for crude oil. Most oil-market forecasts published in the first half of 2021 didn’t anticipate the 75% jump in new weekly coronavirus cases that has occurred since mid-June, or new possibilities for travel limits and other restrictions of the type that clobbered economies — and oil demand — around the globe in 2020. Obviously, swerves away from expectations for oil consumption scramble the supply-demand balances widely used in oil-market analysis. But they do happen. In fact, deviation between forecast and actual demand is the rule, not the exception. It’s just not always as extreme as the balance adjustments likely to be needed after the latest COVID surprise. Even when there’s no deadly pandemic to worry about, demand can be tricky to define, difficult to measure, and frustrating to predict. In today’s blog, we discuss the intricacies of oil-demand assessment and explain why balance calculations, based on forecasts destined to be wrong, remain meaningful to analysts mindful of their limitations.

As we pointed out in Everybody Wants To Rule The World, Part 2, a handy way to track what’s going on in the global oil market is to compare the balance projections updated and published each month by the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA), and the Organization of the Petroleum Exporting Countries (OPEC). That the three agencies look at the same market yet differ in their assessments at any given time attests to how challenging it can be to know how much oil is available (supply) and how much is consumed (demand). We highlighted the ambiguities in Third Dimension and emphasized that price is always the best moment-by-moment indicator of the supply-demand interplay. But price itself depends on what buyers and sellers of crude oil and oil products expect for the fundamentals, not only for liquid hydrocarbons but also for natural gas and other energy forms because commodity markets are linked. It’s helpful, therefore, to understand how the agencies assess supply and demand. We examined EIA’s assessment methods for the U.S. market in our One Piece At A Time blog series. Today we take the global view, concentrating on the market fundamental most directly whipsawed by the COVID-19 pandemic: demand.

We’ll compare the most recent IEA, EIA, and OPEC balance projections later. First, we need to understand the degree to which COVID demolished demand forecasts last year. We’ll use only EIA’s numbers for this to keep things simple — or as simple as possible — and because we’ll be focusing on EIA’s methods for demand assessment.

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