IEA, OPEC divergence on oil demand becomes too big to ignore
Ever since the International Energy Agency switched from a pure-play information provider to an advocate of the energy transition, its forecasts about oil demand have shifted to increasingly reflect this advocacy.
This has led to a growing divergence between the IEA’s and OPEC’s outlooks on the future of the commodity, increasing the risk of confusion among analysts and investors. The question “Who’s right?” has become a legitimate one.
To begin with, it’s worth noting that neither authority is completely impartial. OPEC has a vested interest in stronger global demand, so there may well be an overestimation bias in its outlooks.
The IEA, on the other hand, acts like it has a vested interest in the energy transition, which has led it to regularly underestimate oil demand, with its most marked departure from reality to date contained in the original Net Zero Roadmap.
The document came out in May 2021. In that report, the IEA said there was no need for new oil and gas exploration as of that year because the energy transition was moving fast enough to make that redundant. But did not take long for the IEA to revise its view. In November of that same year, the agency called for more investment in new oil and gas exploration amid a risk of a supply shortage.
Last year, the IEA began the year by forecasting oil demand growth at 1.9 million barrels daily. Over the next 11 months, it kept revising this, to end the year at 2.3 million bpd in global demand growth—a view it held over January this year as well, and a figure very close to OPEC’s forecasts during the year that all saw demand growing by over 2 million barrels daily.
Reuters this week reported that the divergence between IEA and OPEC demand numbers is the largest in 16 years, based on the analysis of data going back to 2008. This divergence concerns the February oil demand forecasts of the two organizations, and the gap is indeed considerable, at over 1 million bpd.
In its February Oil Market Report, the IEA forecast oil demand growth at a modest 1.2 million barrels daily this year, citing a deceleration in demand recovery after the pandemic lockdowns. OPEC, for its part, kept its 2024 oil demand growth forecast unchanged from previous months at 2.2 million bpd.
There is also divergence over the longer-term prospects for oil demand, with the IEA last year predicting that it would peak before 2030, along with natural gas demand and coal demand. This prediction seems to have been the last drop for OPEC, which reacted with a sharp warning to the IEA to stop politicizing energy, accusing it of cheerleading for the energy transition and letting this affect the accuracy of its forecasts.
“The IEA has a very strong perception that the energy transition will move ahead at a much faster pace,” a former official at the agency told Reuters.
“Both agencies have boxed themselves in with a position, which is why they have this enormous gulf in demand forecasts,” Neil Atkinson, former head of the agency’s oil markets division explained.
Some form of bias is almost unavoidable when it comes to predicting oil demand, and this is precisely because of the massive push for a transition that has seen a lot of money funneled into climate advocacy organizations that, among their advocacy activity, also deal in forecasting.
In itself, this bias is not a problem as long as the users of that information are aware of it. It becomes a problem, however, when biased forecasts begin to be shared and amplified, painting a distorted picture of, in this case, oil demand growth prospects and affecting investment decisions.
