Oil Market Report February, 2017

For those of us who spend (too) many hours studying the “form” of oil prices, there is one source that tends to surpass the others for clarity and reliability. Yes we could go to the specific price reporting agencies (Argus, ICIS etc), the wider business press (FT, Bloomberg) or the oil companies themselves, but invariably their information is either overly trading focussed (ie, short-term) or geared towards the interests of financial institutions and investors.

The International Energy Agency (IEA) on the other hand, not only takes a longer-term view of energy issues but it also operates above the vested interests of commercial organisations. Its official role is not data provision of course – that comes as a bi-product of its main mission in life which is to ensure the world has a reliable supply of energy available at all times. This grand aim is achieved by mandating its 29 member states (including the USA, Canada, Japan, Australia and most of the EU) to permanently hold 90 days of oil consumption and this enforced oil stocking regime guarantees that a combined global fuel stock holding of over 700bn litres is held-back – ready for a crisis.

In addition, the presence of the emergency stock reserve can also “cool down” over-heating markets. Such an event happened in 2005, when in the aftermath of Hurricane Katrina, circa 40% of US refining capacity was knocked out and gasoline prices consequently doubled overnight. In response, the IEA immediately ordered a partial (5 day) release of the global stock reserve and the effect was as rapid as it was impressive, with prices returning to their previous levels within 48 hours. The profound influence of an oil stock release does therefore illustrate the huge influence the IEA could have on oil prices, to the point of possible market manipulation. But the organisation is very sensitive to this fact and stock releases are in fact extremely rare events. Other than Hurricane Katrina, there have only been 2 releases since the IEA’s foundation in 1974; one during the first Gulf War in 1991 and then again, during the 2011 Libyan Crisis.

So because oil crises are thankfully rare, the rest of the time the agency can focus on providing information and statistics on all forms of energy. Its World Energy Outlook is by consensus, seen as the global Energy Bible and is used by Governments and international institutions as the basis for many energy related policies. In terms of philosophy, the !EA champions “rational energy policy” which balances economic development with the needs for alternative energy generation. This can and does lead to criticism that the organisation follows the well-trodden neo-conservative path of other multi-national organisations (IMF, World Bank etc) and that it peddles the interests of key member States (for example oil & gas interests in the USA). The Agency is also accused of underplaying the potential of renewable energy and critics are always quick to point out when incorrect energy price predictions have been made.

But overall, the IEA still sticks to the facts and stats without spin, and with no over-riding agenda other than following its “rational energy policy”. They are quick to point out that it is politicians that decide the direction of energy policy and that the Agency’s role is simply to show where that direction will take us. So rather than making out and out energy predictions, the organisation makes what it calls “policy dependent projections”. Equally it sees its role as informing the policy makers of what the reality is, at ground level. So when the IEA talks about renewable energy being “the only credible path to achieving climate objectives”, they still have to balance this viewpoint with the fact that well over 90% of global energy comes from fossil fuels and that therefore a full transition to renewables will be long, costly and slow.

The Agency also often gets things very right. 10 years ago, when the world was getting itself in an increasing frenzy over Peak Oil (the idea that oil was running out), the IEA highlighted technical developments in extraction technology and stood firm against the vocal accusations that they were ignoring the “realities” of Peak Oil. Fast forward to today’s oil glutted world and it would seem that all the wisdom was with the IEA. And finally they are not afraid of challenging member states, when politicians make declarations that are not borne out by realism. The most recent example of this was the challenge to President Trump’s statement that the USA would soon be delivering “1,000 years of clean coal”. In refuting this, the IEA stated the economic realities of the global coal market; falling demand, oversupply, increased environmental legislation (outside the USA) and the abundance of low-cost natural gas. All of which means that US coal companies will almost certainly continue to cut capacity and in doing so, will surely lead to American coal miners feeling increasingly let down by the impossible promises made to their industry. As IEA Head Fatih Birol candidly put it; “policies are important, but economic facts are stubborn”. A very rational approach…