OPEC’s Faith in Oil Demand Rise Rests on Shaky Ground

Wall Street Journal ^ | Dec. 3, 2015 | SARAH KENT

[thackney]

The Organization of the Petroleum Exporting Countries' bet that oil demand will steadily rise in 2016 has a looming problem: Consumption is notoriously difficult to predict.

Since 2010, the oil market's three biggest supply-and-demand forecasters--the International Energy Agency, the U.S. Energy Information Administration and OPEC itself--have rarely been accurate in their short-term forecasts of demand growth, a Wall Street Journal analysis found.

For instance, in December last year, the EIA predicted oil demand would increase by 900,000 barrels a day in 2015. But in its latest revision it said consumption increased by 1.4 million barrels a day this year.

On average, the agencies' December year-ahead forecasts have missed their later assessments of actual consumption by 600,000 barrels a day since 2010, according to the Journal analysis.

The mistaken prognoses highlight the challenges OPEC faces on Friday when the group's ministers gather in Vienna for a potentially contentious meeting. Some in OPEC want to cut output in a bid to boost sagging prices, while Saudi Arabia has indicated keeping the spigots open will drive out producers thought to need high prices to pump. The group is unlikely to change course, analysts say.

Underpinning OPEC's policy is faith that rising consumption will ultimately soak up the extra supply in the market and drive prices higher again.

In November, Saudi Arabia's deputy oil minister Prince Abdulaziz bin Salman told a conference in Qatar that a key difference between the current downturn in oil prices and the historic slump in the 1980s is that this time around demand continues to grow. A week later, oil minister Ali al-Naimi told an industry gathering in Bahrain that the oil sector needs to continue, if not increase, investment to expand capacity in order to keep up with rising consumption.

If that doesn't happen, it would be bad_news...