The world has been using a lot more oil than we thought

Remember all that missing oil I wrote about last month? The discrepancy between where stockpiles ought to be (based on implied supply and demand balances) and the volumes that had actually been reported or measured? 

Well, those barrels are missing no more. As I feared, it turns out they've already been used up — in the refineries and petrochemicals plants of China and Saudi Arabia. That means oil balances are a lot tighter than the International Energy Agency previously thought.

The group published its latest monthly report on Friday, revising its historical oil demand numbers all the way back to 2007. Yes, that's right, for the past 15 years the world has been using more oil than the primary monitoring agency that advises consumer governments thought.

Demand Revisions

The IEA has revised 15 years of global oil demand

The changes aren't small. At 2.9 billion barrels, the additional demand they've just found is equivalent to five times the US Strategic Petroleum Reserve, or an entire year's worth of consumption in France, Germany, Italy, Spain, the UK and Mexico.

Not surprisingly, the revisions were made to oil products and in sectors that are among the least transparent in the oil balance — the petrochemicals industries in Saudi Arabia and China.

That doesn't make them unimportant. Petrochemicals is the fastest-growing sector in medium-term oil demand forecasts and it is an area that has seen rapid expansion during the Covid-19 pandemic due to a surge in demand for personal protective equipment and for packaging that has accompanied the boom in online shopping.

The impact on estimates of global oil stockpiles during the pandemic is stark.

All Gone

Oil stockpiles are back below pre-pandemic levels after IEA demand revisions

The 660 million barrels of surplus stockpiles that the IEA saw a month ago have evaporated. The demand revisions mean that the agency now estimates that global oil stockpiles fell below their end-2019 level by the start of 2022.

And that may not be the end of it. Stockpile data for the OECD countries suggest that there may be more demand revisions to come from the IEA.

Commercial oil inventories among the developed economies of the group's members fell by 60 million barrels in December, and initial estimates suggest they dropped further last month. That comes in stark contrast to the warnings from Saudi Energy Minister Prince Abdulaziz bin Salman that the oil balance would swing from deficit to surplus in the final month of 2021.

That the oil market is still tighter than forecasts indicate won't come as a huge surprise to those who've been following the rise in prices over the past two years. In a remarkable parallel to the oil squeeze of 2007-2008, the path of Brent oil prices has almost exactly matched that of the earlier period during the post-pandemic recovery.

Look Familiar?

Crude rally looks like 2007-08 that ended in a crash

The one significant divergence came after US President Joe Biden threatened, then delivered, a release of oil from the strategic petroleum reserve when the OPEC+ group of oil producers refused to open their taps more quickly. The relief was short-lived, and by the end of January, oil prices were back where they had been at the same point in 2008.

How long they continue on their upward path may depend on whether the US shale patch or a revival of the Iran nuclear deal rides to the rescue.

It has been clear for many months that the OPEC+ group is incapable of adding the supply it keeps promising. The latest analysis from my colleagues at BloombergNEF shows that 15 of the 19 countries with output targets failed to meet them in January. Production by the 13 OPEC countries rose by just 65,000 barrels a day last month — one-quarter of the planned increase.

So the supply is going to have to come from somewhere else. The US Energy Information Administration has been getting steadily more bullish about the shale sector. Earlier this month it raised its domestic production forecast by another 200,000 barrels a day for the second half of 2022 and most of 2023. It now sees production approaching its pre-pandemic peak by the end of next year.

A quicker source of incremental supply might be a return to the 2015 Iran nuclear deal that could rapidly unlock 1.3 million barrels a day of the Persian Gulf country's production, enough to upend forecasts of oil prices rising above $100 a barrel later this year. The Biden administration says a deal with Iran is now in sight but rapid advances in the Islamic Republic's nuclear program mean the window for reviving the accord is narrowing.

Without those production boosts, though, the market will have to be brought back into balance by demand destruction. High oil prices, which are helping to stoke inflation, will inevitably start to slow demand growth, but the farther prices rise, the harder they'll fall.

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.