Crude Oil Prices: Battle of Two Titans

Dr. Ken Rietz

March 21, 2024

In a commentary earlier this week, we wrote an article on crude oil price forecasts, citing both the Organization of Petroleum-Exporting Countries and their allies (OPEC+) and the US Department of Agriculture’s Energy Information Administration (EIA). The forecasts of crude oil demand from OPEC+ and the EIA were not identical, of course, but they could be reconciled with each other. There is, however, a third organization putting out crude oil demand forecasts that is comparable to these other estimable agencies: the International Energy Agency (IEA). The projections of the IEA differ significantly from the others, and the differences between the IEA and particularly OPEC+ are widening. I want to examine those differences in this commentary. But first, I want to give the graph of the prices of ICE Brent crude, which would be the price of crude oil that both OPEC+ and the IEA would reference. In all that follows, \oil” will refer explicitly to Brent crude oil.

Figure 1: The crack spread for May 2024 WTI crude oil, in USD per barrel

To illustrate the situation, the forecasts by the three organizations for the increase in demand for oil over the year 2024 are: 1.3 million barrels per day (mbd) for the EIA; 2.25 mbd for OPEC+; 1.1 mbd for the IEA. The difference between the IEA and OPEC+ is the greatest, and this commentary will focus on them. We attempt to figure out why the difference is so large; according to Reuters, it is the largest in 16 years. At the end, I will give which one I am inclined to trust more, and why. In 2021, the IEA issued a Net Zero Roadmap, and declared that the transition to clean energy was going so well that there did no need to do any more exploration for oil or gas. They also estimated that \peak oil” would be reached by 2030. This is, to a large extent, the reason that their projections for the demand for oil are low now. But they make up for low estimates by revising their estimates during the year. OPEC+ rejects their low estimates and “peak oil.” Exploration techniques, technology improvements and the resourcefulness of the oil industry have regularly enabled an increasing supply of oil which has been welcomed by a world that is effectively addicted to petroleum products.

Another significant difference is the expectations for global growth. Of course, OPEC+ takes the high end of the projections given by the major economies, since the highest demand correlates to the highest price of the oil that is sold by their countries. The IEA is using now a global economic growth about half of the current year’s growth. This opens up a large can of worms, but the health of the economy in the US is tied to a \soft landing” which is still not certain. The Chinese have also published targets for their economy. It would not be surprising if they hit their targets, but very few believe the validity of the supporting numbers. OPEC+ is clearly biased due to the advantages it brings, but the validity of the IEA’s estimates is not clearly better.

Which group is correct? That is the wrong question, actually. It is better to ask which group’s

estimate is closer to the correct value. But there is a problem. The IEA keeps adjusting (upward) its estimates. Over 10 of the past 12 years, the IEA has issued low estimates, and then increased them during the year as demand exceeded the amounts predicted. This has already happened in 2024, when the original estimate of 1.1 mbd made on December 2023 was increased by 0.18 mbd. While OPEC+ can change their estimates, they try not to do that. Perhaps the actions during 2023 can be a guide.

In early 2023, OPEC+ produced a projection of an average increase in pumping oil would increase by 2.2 mbd by the end of 2023. This was a rather startlingly large amount, and not easily accepted by most of the world. The IEA estimated 1.6{1.7 mbd, a much easier figure to accept. But by the end of the year, the IEA revisions hit 2.3 mbd, validating the OPEC+ figure. This, of course, doesn’t mean that the OPEC+ figures are better every year, but it does incline me to trust OPEC+ estimates more than IEA, especially early in the year.