What Glut?

Surplus Is Not Glut, and Assumption of Surplus Balance Itself Is In Doubt

December 8, 2024

Oil market bears foresee an oil supply glut in 2025. However, investors should notice that OPEC+’s Dec. 5 revised production plan flips the EIA’s 2025 world oil liquids balance into a small deficit, all else equal. EIA will publish its monthly update for this balance two days from now (Tue. Dec 10). If EIA elects to trim its oil supply projections but leave its oil demand projections intact, its 2025 world balance will tighten from +0.31 million b/d toward –0.05 million b/d.

That outlook is not a supply glut.

Our baseline scenario models a +0.20 million b/d world liquids balance for 2025 at $70 and $75 annual average prices for WTI and Brent respectively.

This outlook is not a supply glut either.

OPEC+’s revised production plan still leaves a large surplus embedded in the IEA’s projection for the 2025 world liquids balance (>1.1 million b/d), all else equal. Relative to consumption, this balance would mark the fifth-largest surplus since 1997. If achieved, that outcome could fairly be described as a supply glut. IEA will publish its monthly update for this balance four days from now (Thurs. Dec 12).

The large delta between IEA’s glut forecast and others’ non-glut forecasts raises an obvious question: how do IEA’s prior projections track against realized outcomes?

Throughout 1H2023, IEA repeatedly projected about a –2.0 million b/d deficit for 4Q2023.

Throughout 2H2023, IEA repeatedly projected deficits of –0.5 million b/d or more for both 4Q2023 and 4Q2024.

However, nearly one year after the conclusion of 4Q2023, IEA’s calculations now say the actual balance in 4Q2023 was a +0.7 million b/d surplus. IEA’s balance projections for 4Q2024 have dropped from a +1.1 million b/d surplus (as of Feb. 2024) back to a flat, or zero, balance (as of Nov. 2024).

In sum, IEA now estimates there was no large hole in the balance for either 4Q2023 or 4Q2024. Indeed, at both tenors, IEA now says there was no hole at all.

This is an informative observation, not a slam against the IEA or its analysts. The slide above is also a valuable reminder of two humbling facts. First, it is exceptionally difficult to forecast the future behavior of a beast as complex as the world oil market. Second, any balance projections are views as of a moment in time under conditions of massive uncertainty and subject to uncountable conditional probabilities.

The 2025 glut forecast is already living on borrowed time. The IEA’s 4Q2024 assessment may change again as soon as four days from now when IEA, as previously mentioned, publishes its next Oil Market Report (Thurs. Dec 12). In last month’s update (Nov 14), IEA dropped its 4Q2024 balance estimate from a +0.2 million b/d surplus to a flat balance (i.e., neither surplus nor deficit). This is IEA’s tightest projected 4Q2024 balance since its projections made in July 2024. Both EIA and Blacklight presently have the 4Q2024 balance at a –0.3 million b/d deficit, which is also where IEA’s estimate was six months ago (June). A tighter 4Q2024 balance holds bullish-leaning implications for the 2025 balance too, all else equal.

Putting the pieces together, there are favorable odds that (a) EIA should and will tighten its 2025 balance on Tuesday, and (b) IEA should and will tighten its 4Q2024 balance (and maybe its 2025 balance too) on Thursday. Those revisions, if they happen, could catch glut-believing investors off guard and spur a short-covering rally.

But whatever any forecaster opts to do with its projections, here’s the rub for risktakers looking at 2025: be skeptical of big outlier balance forecasts.

If an IEA-projected –2.1 million b/d deficit can entirely reverse and become a +0.7 million b/d estimated surplus (4Q2023) and, immediately following, an IEA-projected +1.1 million surplus can become (for now) an estimated flat balance (4Q2024), then how might an IEA-projected +1.2 million b/d surplus (4Q2025) evolve over the long year between now and when we arrive at that forward moment in time?

Short answer: there are high odds it vanishes.

There are scenarios where a +1.2 million b/d surplus in 4Q2025 could happen, of course. Just as there were scenarios where a –2.1 million b/d deficit in 4Q2023 could have happened but did not. The key question is what probability attaches to these scenarios and whether unusually large deficits or surpluses are reasonable as the baseline view for guiding investors’ risk taking.

In the immediate present for the waning days of 4Q2024, hot weather continues to be a drag on global heating fuel demand across diesels and natural gas (first slide below). However, U.S. crude runs are at a five-year high and export demand for U.S. crudes has fully revived following the active hurricane season.

Our risk assessment concludes there is about a 30% probability that cash WTI exits 2024 below $65 per barrel (Will it break?, 20-Nov-2024, and A non-random walk to $68.00 oil, 2-Dec-2024). This risk increases to about a 40% probability by the end of next year.

However, probabilities for the upside price scenarios also increase. For example, we peg the risk of >$90 WTI at zero before yearend 2024, 16% at the end of June 2025, and 25% by the end of next year. On the downside, we assess the risk of a sub-$50 WTI price is 11% at midyear 2025 and 16% at yearend 2025.

IEA’s World Oil Demand Numbers Are Too Low

To better understand why IEA projects a glut for 2025, we examine the underlying liquids production and liquids consumption estimates that yield IEA’s balances (balance=production-consumption).

IEA’s world liquids demand growth estimate for 2024 is now +920 thousand b/d, up from a previous estimate of +860 thousand b/d (October). The current estimate (+920 kbd) still looks too low relative to the full suite of global data on economic growth (GDP), industrial production, transportation activity, weather, trade, refinery operations, observed inventory changes, and so on. EIA, for example, estimates 2024 world liquids demand growth is running closer to +990 thousand b/d. Our baseline scenario pegs that number at +1.05 million b/d.

Moreover, the IEA’s growth forecast applies to a 2023 base (101.9 million b/d) that is significantly lower than other forecasters’ 2023 bases. For reference, today EIA puts 2023 world liquids demand at 102.14 million b/d and OPEC puts it at 120.20 million b/d. Each of these 2023 bases is at least 240 thousand b/d higher than the IEA’s comparable figure. This fact in turn means that the IEA’s 2025 world demand projection is also starting from a 2024 base (102.8 million b/d) that looks too low by at least 300 thousand b/d. EIA puts 2024 world liquids demand at 103.13 million b/d. Our figure is above 103.2 million b/d. OPEC’s is at 104.0 million b/d.

Likewise, IEA’s projection for 2025 world oil liquids production (105.0 million b/d) also looks too high relative to OPEC+ production discipline, the underlying drilling data, and the economics of oil supply at current prices. Objectively, the current balances projected by IEA—an agency founded to promote the interests of sovereign oil consumers—appear too biased toward a view of supply glut and low price. Meanwhile, the balances published by OPEC—an organization founded to promote the interests of sovereign oil producers—appear too biased toward a view of demand boom and high price. We see value for investors in comparing these projections side by side.

Surplus does not necessarily mean glut

Between 1997 and 2024 (inclusive), the annual world liquids balance has been in surplus in 12 of 28 years. Only four of those years (1997, 1998, 2015, 2020) posted surpluses relative to world consumption that were greater than one standard deviation above the 1997-2024 mean.

Said another way, historically two-thirds of surpluses were not gluts.

It is true that IEA’s current projection for the 2025 balance, if it transpired, would mark the fifth glut since 1997. However, at present this still looks like an outlier scenario, especially in light of OPEC+’s latest actions on production policy. Our assessment is IEA’s underestimation of world liquids demand in 2023 and 2024 is unduly producing this forecast result as a baseline for next year. We expect all three of the 2025 forecasts in the chart above to drift toward the 1997-2024 average as global demand growth improves from the softpatch in 2H2024 and projections are updated (IEA and EIA tighten, OPEC loosens).

There is another base effect that bears on any claim of supply glut: starting inventories.

The fact is commercial crude stocks are presently near five-year lows in the United States (423.375 million barrels, Nov 29), according to the U.S. Department of Energy. Government-controlled crude stocks across all OECD countries stood at 918.7 million barrels at the end of Sept. 2024, according to the IEA. These strategic reserves have been drawn down by 23% since the same month three years ago.

Historically low crude oil stocks as a starting point for 2025. That’s not a supply glut either.

Conclusion

IEA presently projects a large surplus of +1.2 million b/d in the 2025 world liquids balance. This projection has promoted a widespread assumption that a price-crushing supply glut will emerge in oil next year. Partly in response to this fear, three days ago OPEC+ deferred planned production restarts by at least three months and perhaps indefinitely. If restarts happen at all, they will be both later, smaller, and slower than previously planned. This change will have to be addressed in the monthly oil market reports to be published this week by EIA (Tue Dec. 10), OPEC (Wed Dec. 11), and IEA (Thu Dec 12).

As we await those forecast revisions, prompt WTI oil prices are presently testing $68 for the fifth time in three months. The current test is happening for two main reasons other than the potential for a combined break in OPEC+ oil supply discipline and world oil demand health.

First, a large tranche of producer hedging has been moving through the futures and options markets as a sovereign implements its annual hedging program for 2025. This hedge typically flows through the market between mid-November and mid-December every year. Its depressant effect on price will soon ebb once the trades are completed.

Second, the NYM crude derivatives markets are probing the potential for U.S. marginal oil production cost, inclusive of capital cost, to drop by 10% or more over the next four years. President-elect Trump’s nominee for U.S. Treasury Secretary has devised a “3-3-3 Plan” to spur growth, tame inflation, restore macro prudence, and promote financial stability. The plan’s final “3” refers to boosting U.S. energy production by 3 million barrels per day oil equivalent (i.e., the increase could include supplies of natural gas, biofuels, natural gas liquids, etc). The nominee does mean a net increase.

Yet this strategy is about more than mere headline quantity growth. Its subtle and compelling power lies in the potential for those new energy supplies to shift the energy production cost curves materially to the right and thus displace higher-cost production with cheaper, more efficient American production. This cost shift would spur powerful disinflationary forces and deliver potentially transformative benefits for both the U.S. and world economy. Even in the futures markets, it will take time for the price effects fully to emerge, assuming the 3-3-3 plan is more or less successfully implemented. This is why the present test of $68 is still a probe rather than a problem for longs in prompt oil futures and energy equities.