The Singular Most Important Factor Signaling A Potential Increase In Crude Oil Prices

One of the factors that have kept oil prices depressed in the last couple of years is the markets report indicating a consistent decline in global crude oil demands. The clamor for a greener earth is forcing people to make eco-conscious buying decisions to reduce their carbon footprints. The rise of alternative energy technologies is also reducing the demand for fossil fuel as a form of energy. However, Wall Street analysts are starting to think that the statistics about the declining demand for crude oil might have been exaggerated.

Oil demand might have been underestimated

To start with, the International Energy Agency, which provides data on estimates of annual crude oil demand globally among other things, has indicated that there may be differences between its estimates and actual crude oil data because it is hard to get data from some oil producing countries.

Of course, many stakeholders in the global energy market would have suspected that crude oil trades on incomplete data. Samantha Alphonse, an analyst at Lionexo notes that “commodities traders understand that commodities such as crude oil trade on incomplete data.” However, the increasing realization that fears about reduced demand for oil might not match the realities of the actual demand suggests that there might yet be hope for an uptrend in oil prices.

An examination of global crude oil demand estimates and actual demand data shows that the IEA has had upward revisions of its annual crude oil demand estimates in the last seven years. In 2016, the IEA revised its global crude oil demand up by 901,700 barrels per day indicating that the demand for crude oil was almost 1 million barrels per day more than its original estimates. In the last seven years, the IEA has revised its global oil-demand estimates up by an average of 880,000 barrels per day.

Wall Street analysts think that the IEA is consistent in its upward revisions of global crude oil demand; hence, the 2017 global crude oil demand might have been underestimated. Rob Thummel, portfolio manager at Tortoise Capital Advisors observes that “in recent years, we’ve seen oil demand being constantly revised higher and by the looks of it this year shouldn’t be any different.”

Oil prices could have significant uptrend ahead

It the IEA behaves true to form and it has underestimated crude oil demand this year, we can reasonably deduce that the demand for oil is higher – by extension, we can submit that the fears of a large gap between the supply and demand of oil might have been overstated.

Analysts have estimated the volume of excess crude oil supply to be about 1% to 2% of the total market of crude oil. Available market data indicates that oil producers sold about 97 million barrels of oil each day in 2016. Hence, the demand-oversupply analysis technically indicates that the supply glut is between 970,000 barrels per day and 1.94 million barrels per day.

However, upward revisions data indicates that the IEA underestimates global crude oil demand by 880,000 barrels per day. Hence, actual volume of oversupply in oil might technically be between 90,000 barrels per day and 1.06 million barrels per day.

Of course, my analysis doesn’t take into considering the global crude oil inventories and the potential ability of U.S. shale producers, OPEC members, and other oil producers to increase their oil output. Nonetheless, there’s a possibility that oil prices might record a significant increase going forward if oil traders start to seriously consider the possibility that the supply glut has been overestimated.


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