HFI Research take on IEA's November report

[dan_s]

It's another month and the IEA is back at it again with its ridiculous 2025 oil market supply & demand forecast. According to the IEA, 2025 oil market will be oversupplied by ~1 million b/d.

You will notice in the "note" section that it assumes OPEC+ production cuts stay in place. That is not what you think it's saying.

More specifically, the IEA increased crude production for Russia, Kazakhstan, and Azerbaijan, totaling 440k b/d. If the voluntary cuts stay in place, then we should see these figures translate to the surplus, which is clearly not the case.

What's also interesting about how IEA is messaging it is that by promoting an oil surplus in 2025, it is saying that the oil market will be stable again.

Here's what it said in the report: "Our current balances suggest that even if the OPEC+ cuts remain in place, global supply exceeds demand by more than 1 mb/d next year. With supply risks omnipresent, a looser balance would provide some much-needed stability to a market upended by the Covid pandemic, Russia’s full-scale invasion of Ukraine and, most recently, heightened unrest in the Middle East."

This is a notable statement considering that global oil inventories are trending to multi-year lows again.

If oil balances fail to build to IEA's expectation, then I guess more volatility could be expected.

Issues with the forecast...
Right off the bat, we see at least ~300k b/d of overestimation from OPEC+. Notably, the increase in OPEC+ production makes us wary of what the IEA is trying to achieve by promoting a massive surplus in 2025.

To follow that up, IEA has not made any changes to Iran's crude production for 2025. Our take is that Iran will lose exports due to harsher enforcement. By our estimate, the paper barrels lost will be roughly ~1 million b/d, while the real loss will be closer to ~800k b/d.

If Iran's production is lost, then this immediately eliminates the entirety of the surplus IEA is projecting. We do think that the Saudis and others from OPEC+ will step in to fill the void but with a lag. This means that if the Trump sanction enforcement does not actually impact Iranian crude exports, then the Saudis will wait until they see material changes.

Either way, the net impact on the market is neutral.

The other issue we have with IEA's forecast is for Q4 2024, it has US crude production average of ~13.628 million b/d and ~13.721 million b/d by Q2 2025.

We think this will overstate US oil production by ~228k b/d for Q4 and ~251k b/d for Q2 2025. In aggregate, we think IEA is overestimating US oil production by ~250k b/d, which is 25% of the oversupply.

Turning over to Brazil, IEA completely whiffed Brazil's oil production for this year, but it's back at it again with its Excel drag modeling.

It is clear that Brazil's existing decline rates are higher than previously expected. New projects will stem some of that decline and push production higher, but we think the growth estimates are optimistic. Brazil accounts for ~100k b/d of overestimation.

In aggregate, US, Brazil, and OPEC+ production overestimation account for ~650k b/d of the oversupply in IEA's estimate. Assuming that IEA is correct in everything else, the oil market will still be oversupplied by ~350k b/d.

One of the reasons why the oil market is subdued despite low inventories...
If you are scratching your head about why oil prices aren't moving meaningfully higher despite low global oil inventories, it's primarily due to demand. As you saw in our supply exercise above, the oil market balance still has the risk of being oversupplied by ~350k b/d.

For 2024, IEA is estimating ~0.9 million b/d of demand growth and for 2025, it is estimating ~1 million b/d.

With how much supplies are expected to increase, ~1 million b/d is insufficient to push oil prices higher. We need to see demand improve meaningfully for us to structurally move higher in 2025.

Once again, we think it just comes down to China.

If you look at IEA's global oil demand forecast, China's oil demand forecast for 2025 is barely higher than 2024. This is where there could be a lot of delta gained.

For 2025, IEA expects oil demand growth of ~188k b/d. Vitol, on the other hand, expects China's oil demand to grow ~700k b/d in 2025. The ~512k b/d delta here is more than enough to push global oil balances into the deficit for 2025. And if this demand forecast materializes, it will allow oil to average in the high $70s to low $80s.

Conclusion
I think there's too much negativity surrounding the 2025 oil market balances. The oil market is already seeing through some of that with Brent timespreads moving back into backwardation and Q4 inventories surprising to the downside (versus IEA's neutral balance forecast).

IEA is overly optimistic on supply growth assumptions, and will, in turn, have to revise everything lower after the fact. It is clearly trying to sell a message, but watch the tone start to shift after President Trump takes office.