Energy Prospectus

Note from HFI Research this morning: "Missing Barrels" Point to Larger-than-Expected Inventory Draws

In the IEA’s November report, its paper supply/demand balance for the third quarter of this year implied a global oil inventory build of approximately 400,000 bbl/d.

However, data on observed physical oil inventories indicate that draws occurred at a far greater rate. This trend is evident in satellite inventory data from Kpler, but it’s also apparent in the IEA’s own published figures.

The agency reported a 1.2 million bbl/d draw in observable inventories in the third quarter, three times its 400,000 bbl/d modeled draw. The difference between the inventory changes implied by the paper balances and the changes observed in physical global inventories are referred to as “missing barrels.”

The current missing barrel tally for the third quarter of 2024 is depicted in the chart below.
Source: Bloomberg, Nov. 19, 2024.

This underestimation of demand and/or overestimation of supply that blew out the missing barrel tally in the third quarter repeats a pattern of overly bearish balances published by IEA throughout all of 2024.

Consider that in January, the agency projected builds on the order of 1 million bbl/d in each of the final three quarters of 2024.

As we now know, the inventory builds that were expected to begin in April never materialized. This is a huge miss for the agency that has gone essentially unnoticed.

A similar miss for the fourth quarter that brings forth more missing barrels is likely. If the IEA’s numbers are off as much as we expect, incoming fundamental data will continue to track more bullishly than consensus expectations based on IEA paper balances.

A key implication of these inventory dynamics is that the larger-than-expected supply deficit now underway will carry over into the 2025 supply/demand balance. It will therefore reduce the magnitude of any anticipated oversupply for that year.

This deficit carryover could reduce the inventory builds expected by consensus by as much as 500,000 bbl/d, eliminating the majority of the IEA's forecasted builds for 2025. It could shift the outlook for E&P stocks from ultra-bearish to outright bullish, particularly from today’s depressed price levels.

More from HFI Research this morning:

Brazil Disappoints, Again

Brazil is a major swing factor in the IEA's 2025 supply outlook, accounting for a quarter of next year's anticipated oversupply.

The IEA currently expects Brazil’s production to grow from approximately 3.25 million boe/d as of September 2024 to nearly 4 million boe/d by the end of 2025, representing more than 700,000 boe/d of expected growth over that timeframe.

However, yesterday news circulated that poured cold water on the IEA’s Brazil production forecast. Petrobras (PBR), Brazil’s national oil company, pushed back the extent and timing of its planned production increase over the next few years. PBR accounts for approximately 86% of Brazil's production and nearly all its production growth. Lower growth out of PBR translates into lower growth from Brazil.

PBR’s new five-year capital plan calls for production to increase from 2.8 billion boe/d today to 3.2 million boe/d by 2029. The 300,000 boe/d represents nearly all of Brazil’s growth over that timeframe.

The news illustrates the stark difference between the IEA's forecast and reality. Whereas the IEA is expecting Brazil’s oil production to increase by 700,000 boe/d of growth over the next fifteen months, PBR is calling for just 300,000 boe/d of growth over the next five years.

PBR’s growth will come from its new deepwater “pre-salt” offshore projects. All the while, its other production from “post-salt” offshore and shallow water/onshore reservoirs will decline at a rate of 10% per year. Such a high decline rate on a large production base increases the risk that production growth misses expectations if PBR fails to execute.

Poor execution would be in keeping with PBR’s long-term track record. With the exception of 2023, PBR has routinely failed to meet the market’s—and its own—annual production growth expectations due to higher-than-expected decline rates on legacy post-salt production, delayed startup of pre-salt projects, and overly optimistic internal growth forecasts that get cut and pasted each year into the IEA’s projections.

These issues caused the IEA to lower its 2024 growth forecast for Brazi several times this year. It had initially pegged Brazil's growth at 300,000 boe/d after the country's surprise outperformance in 2023. Every few months, however, it revised its estimates lower. It now expects Brazil to post flat production in 2024.


I expect PBR's recent extension of its growth timeline to cause the IEA to revise its 2025 Brazil production growth assumption downward. If it does, the agency's forecasted 2025 oversupply will be whittled down further, creating another bullish tailwind for oil prices and E&P stocks.