Regular readers of this column know that I frequently caution against putting too much faith in forecasts, especially long-range outlooks. For traders, there are risks associated with relying on any particular forecast since doing so can lead to the wrong trades or missed opportunities betting against the prevailing opinion.
One reason to distrust forecasts and projections: the frequency with which the institutions that create them change their numbers. They regularly adjust their results as data prove them imprecise.
Here are some recent projections for global oil demand for 2020 that have already changed significantly:
Regularly Adjusted Forecasts
The latest EIA Short-Term Energy Outlook (STEO) released on May 12 predicts global oil demand in 2020 will average 92.6 million bpd, a decline of 8.1 million bpd from 2019. But in April, only one month earlier, the EIA had anticipated that figure would be 95.5 million bpd. The May outlook dropped by 3%. Kudos to the EIA for making an adjustment, but if April's numbers were wrong, should we believe that May's are right?
OPEC, which just yesterday released a new Monthly Oil Market Report (MOMR) now projects that global oil demand in 2020 will decline by 9.07 million bpd to 91.10 million bpd. While in April, OPEC's estimate was 92.82 million bpd, a 1.9% drop in one month. Where will it be in two months, six months, one year?
Rystad Energy has been updating its oil demand forecasts on a weekly basis. On May 7, it projected that global oil demand in 2020 would average 88.7 million bpd, a change from its 90.5 million bpd estimate a month prior. That’s a drop of almost 2%.
The changes we saw over the last month are largely attributed to falling gasoline and jet-fuel consumption in March and April due to lockdowns and quarantines to combat the spread of coronavirus. It is understandable that these forecasts would adjust as the effects of the lockdowns on oil demand became clearer.
Changing Demand Projections
Over time, these adjustments add up, making it unreasonable to have faith in demand forecasts for months from now. It is important for traders to keep in mind just how much these projections change when looking at the outlooks for the second half of 2020 and into 2021.
The EIA currently estimates that in 2021 oil demand will grow to 99.6 million. There is no way for the EIA to know the length of the current recession, the shape of the recovery, the impact of virus fear on travel, whether there will be a recurrence of the coronavirus, etc.
Goldman Sachs is currently forecasting that global oil demand in 2020 will be 94 million bpd, but it sees an increase to 99 million bpd in 2021. The investment bank predicts a “V-shaped bounce back” likely for oil demand. Rystad’s latest outlook also anticipates a “V-shaped route in oil demand” but its graphs showed a tempered recovery.
Forecasting a “V-shaped” recovery isn’t especially helpful to traders because the slope of the up-side of the “V” matters greatly. It’s merely a way to sound precise and done because no one can predict what the nadir of a recession will look like.
Consumption Models No Longer Relevant Post-Lockdown?
The data from the past used to create models for gasoline consumption may not even be relevant in the post-lockdown world, as patterns of gasoline use and travel could look very different. Regions that end their lockdowns before others could see very different behavior from regions that maintain lockdown policies. There is no way to know the psychological impact of the virus on the traveler, worker or consumer. We do not know how a recession that hurts small businesses the most will look in a recovery, especially in the new economy of online shopping and Zoom conference calls.
There are simply too many variables to make any kind of accurate demand forecast for the long-term. Wise traders will look at the forecasts and the methodologies and reasoning, consider different ideas and make their own decisions.