After a 50 per cent rally in oil prices between February and March, crude has retreated a bit as of late. The upcoming OPEC-Russia meeting in Doha looms over the markets, but few expect the outcome to have any material impact on supply and demand. Global supply still exceeds demand, but there are solid signs that the overhang is finally starting to ease. Storage levels are high, but are expected to come down.

Where does that leave us? With so many energy investors unsure of where the markets are heading, Oilprice.com decided to get in touch with Mike Rothman at Cornerstone Analytics – a macro energy research firm that has produces some of the most accurate data out there. Oil prices may be gyrating up and down, but Rothman provided some juicy clues for investors, highlighting some key near-term trends for crude oil.

A few topics covered:

• “Missing” IEA oil barrels

• Why oil markets are tighter than people think

• What to expect from the OPEC-Russia meeting in Doha

• Why oil prices could spike

• Where investors should put their money

• Mike Rothman’s prediction for oil prices at the end of 2016

Oilprice.com: The IEA has been accused of overestimating global supplies. The WSJ says that somewhere around 800,000 barrels per day are unaccounted for, meaning they are not consumed nor have they ended up in storage. Are these “missing” barrels a big deal?

Mike Rothman: The issue has not been one of the IEA over-estimating supply, but rather under-estimating demand. There are basically two ways to arrive at figures for global oil demand. The IEA methodology is built on an estimate of GDP and an assumed ratio of oil demand growth to GDP growth.

For the emerging markets in particular, that methodology represents a leap of faith since there are >100 countries and close to real time measures for economic activity rank up there with seeing unicorns and leprechauns. Also, in countries where we have better and more timely data for demand and GDP (like the U.S.), we see that oil demand growth to GDP growth ratio fluctuate sharply.

The other way to measure usage (which is what we do at Cornerstone Analytics) is to assess how much physical oil the global system is absorbing. It’s called “apparent demand.” It presumes global oil production data is close to the mark – which is the evident historical pattern – and that inventory changes in the OECD are the proxy for global storage changes. Basically non-OECD countries use oil on a hand-to-mouth basis with the primary exception really being China — whose stockpiling has actually been smaller than generally believed. “Missing oil” is the gap that we see between econometrically estimated demand and apparent demand. Historically, bouts of “missing oil” are resolved by the IEA revising up its demand series. The underlying issue is generally an underestimation of oil consumption in the non-OECD countries.

OP: Are oil markets actually much tighter than everyone thinks?

MR: Yes, in the sense that storage is not as high as generally presumed and yes in the sense that OPEC’s spare production capacity is much more limited than generally believed. But, to be realistic, because petroleum stocks in the OECD countries (which is the proxy for global stores) are high, there is no real concern in the market about availability, yet. We think this changes starting in the current quarter because we forecast global oil inventories will be drawn down contra-seasonally.

OP: What is Saudi Arabia’s position coming into the production freeze? Are they winning the oil war – or are they rather desperate at this moment in time? Data compiled by FGE energy consultancy suggests that Saudi Arabia is losing its leadership position in 9 out of 15 of its major markets.

MR: Our sense is that Saudi Arabia put itself in a position whereby it will wait for global supply/demand to rebalance itself. Most market watchers don’t really understand that back in 2014, the Saudi aim was about coercing a handful of OPEC countries to make production cuts to counter what was a collapse in the “financial demand” for oil. While Saudi Arabia has been burning through $12-$15 billion per month from its financial reserves to fund government spending through this period, it seems the policy is that the path to a much higher price (and higher revenue) will come about by allowing for a prolonged low price.

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