Why IEA's Optimism Doesn't Make Sense


The International Energy Agency, or IEA, is predicting a growth in global oil demand in 2013, a growth led by a resurgent Chinese economy. The Paris-based intergovernmental agency predicts that average world oil demand this year will shoot up by 930,000 barrels per day from 2012 levels.

The market's immediate response wasn't surprising. As expected, global crude oil prices inched higher, and the West Texas Intermediate futures hit a 17-week high. The IEA now forecasts global demand to average 90.8 million barrels per day in 2013.

However, I feel investors ought to approach these numbers with a little skepticism.

Why I'm not too impressed
There's no doubt that China has a considerable influence on global energy dynamics, given that it happens to be the world's second-largest oil consumer. Which is why, when the country reported a higher than expected growth rate of 7.9% in the fourth quarter, the general level of optimism grew in the global markets. The IEA is specifically harping on the fact that Chinese spending in key areas such as infrastructure and electricity could drive increased demand for oil.

The problem, however, is that many analysts and economists aren't too impressed with China's latest growth figures; and I can't find any reason to disagree with them. Most of the country's growth has been fueled by government stimulus. Back in September, the government approved a $150 billion stimulus package for infrastructure-related development. Analysts however believe this shot in the arm will likely wear off by the second quarter of this year. In other words, China's current growth doesn't really look sustainable. Private investments were still in the doldrums.

The biggest concern with government-funded growth is the possibility of another hard landing due to higher inflation. Keep in mind, food prices are already up. Fueling this are fears of another property bubble since a major part of the growth story is related to infrastructure development. The government is now trying to rein in property prices as more middle class families are finding it difficult to afford houses in major cities.

External demand hasn't been strong either. The eurozone crisis, coupled with weak demand from the United States, hasn't been encouraging news to Chinese exporters.

Something rotten as well?
Moreover, there have been concerns regarding data manipulation on exports. Bloomberg reports that analysts at Goldman Sachs and UBS were taken by surprise by the reported 14.1% surge in December exports. In fact, they have found obvious discrepancies with "goods movements through ports and imports by trading partners" not matching with the reported data. Goldman spotted "a divergence from overseas orders in a manufacturing index."

It's pretty evident that China's growth has been fueled by government spending and some clever manipulation of data.

Nothing really optimistic
After delving deeper into these developments, one gets the impression that oil demand may not witness such sustained growth as predicted by the IEA. Also, the agency seems to have flip-flopped from its December report where it says: "Global demand growth is expected to stay relatively sluggish through 2013, based on the continued assumption of tepid global economic expansion - notwithstanding signs that Chinese sentiment has turned mildly positive - and despite stronger‐than‐expected preliminary demand data for October."

Not a complete write-off though
Still, China's requirements for oil cannot be underestimated. The government is looking to exert greater control on the supply side of the equation through its state-run oil companies. These companies are on the lookout to add more oil acreage from around the globe. Last month CNOOC got a firm foothold in Canada's oil sands through its acquisition of Nexen for a staggering $15.1 billion -- the largest acquisition by a Chinese company. Last year, Sinopec struck a $2.5 billion deal with Devon Energy and gained access to several shale plays in the U.S.

And smaller deals have always been around. Fellow Fool Aimee Duffy reports that China has spent more than $200 billion since 2005, to secure its energy future. Now that's huge.

The Foolish bottom line
The next few months should throw better light over the outcome in China, as well as its effect on crude oil demand. My gut feeling says things don't really look rosy. Investors should keep their fingers crossed.

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The article Why IEA's Optimism Doesn't Make Sense originally appeared on Fool.com.

Fool contributor Isac Simon has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published