How Reliable Are Oil Forecasts?

There are a number of agencies that produce short- and long-term crude oil forecasts, including the U.S. Department of Energy’s Energy Information Agency, OPEC, and the International Energy Authority.  Deutsche Bank analyst Michael Lewis has now called the accuracy of these forecasts into question.   From a recent article in the Oil & Gas Journal:

In his assessment of global oil demand and non-OPEC supply growth, Lewis found that, with the exception of 2003-04, all three agencies have been too optimistic about the strength of oil demand, with OPEC the most cautious. All three agencies have been too optimistic about non-OPEC production growth, with DOE the least bullish and therefore the most accurate in its forecasts.

Concerning global oil demand growth since 2001, Lewis found that forecasts have been “quite similar” in their under or overestimation, with OPEC the most accurate over the decade. Lewis worked out that in absolute percentage terms, since 2002 OPEC has averaged a forecasting error of 53.5%, compared with IEA’s and DOE’s error rates hovering at 70-75%. OPEC’s greater demand forecast caution “may help to explain its reluctance to increase oil quotas and production for fear of bearish implications for the oil price,” said Lewis.

However, in 2003-04, “all three agencies underestimated the surge in global oil demand and specifically the strength in Chinese and US oil demand during those years,” he noted. The discrepancy was large in 2004 as DOE forecast demand growth of some 1.6 million b/d whereas the actual increase exceeded 2.5 million b/d. In contrast, in 2005 DOE overstepped market demand accuracy by forecasting a 2 million b/d growth compared with the actual 1.3 million b/d.

Regarding oil production, all three agencies’ forecasts were relatively close to actual non-OPEC growth, which was averaging 1 million b/d for each year during 2001-04. But 2005 was the worst forecasting year as non-OPEC oil production fell to roughly 0.4 million b/d and the three agencies failed to change their growth assumptions, forecasting a non-OPEC production rise of 0.93 million b/d. Since then, non-OPEC growth levels have failed to recover the early decade levels.

DOE has tended to be the most accurate production forecaster: Since 2001 DOE has posted a forecasting error of 51% compared with 63% for IEA and 72% for OPEC.

Looking into 2009 and taking into account the removal of fuel subsidies in many parts of the developing world, Lewis sees DOE’s 1.4 million b/d oil demand forecast growth as “likely to be too optimistic and even the 0.9 million b/d assumed by the IEA and OPEC may prove too ambitious if recent history is a guide.” He said he expects the recent non-OPEC oil production rebound since 2005 set to continue in 2009.

This may require some recalibration of the models…

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