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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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The Multi-Trillion Dollar Oil Market Swindle

The Multi-Trillion Dollar Oil Market Swindle

In the past, I documented the overstatements by both the IEA and EIA in 2014 & 2015 in terms of supply, inventory and understatements of demand. Others also noticed these distortions and, whether intentional or not, they exist and they are very large in dollar terms. These distortions, which are affecting price through media hype and/or direct/indirect price manipulation, are quite possibly the largest in financial history.

Putting numbers behind it, with worldwide production running some 95 million barrels per day, and assuming $55 per barrel for oil, the market for crude oil is about $5.2 billion per day. Each $10/Barrel change is worth nearly $1 billion/day or $365 Billion/year for the worldwide crude oil market. Add the worldwide equity market caps of oil and oil related equities and debt you have a scandal that is in the trillions; a number that cannot be ignored. Related: Top 5 Oil Producing Countries Could See Production Peak This Year

According to Cornerstone Analytics, who have documented the IEA systematically underestimating demand in 2012-2013 only to revise it higher quarters if not years later, the EIA has created the appearance of an imbalance of supply by some 500 million barrels or $2.5 trillion in the last 5 quarters alone. This has easily swung oil by at least $20/barrel if not more.

I have maintained that oil should have corrected to around $70 in the fall of 2014, tied to U.S. production increases which at the time represented the price at which drillers would continue to add to supply. That price tied to cost reductions has probably been reduced to $60ish currently. But today, with the consensus oversupply widely quoted in the media as some 2 million barrels per day worldwide, it’s clear that if the numbers are correct below, the perceived oversupply wouldn’t exist at all. Suffice it to say prices would be at least at the point where production would need to be added, perhaps around $60-$70 per barrel, if not higher.

Assuming that number at $70 and with the blended average of WTI & Brent at $55/Barrel approximately, at $15/Barrel given the 95 million barrels of global production, then we can estimate that global oil markets are being undervalued by about $1.425 billion per day or over $500 billion per year. Related: Carbon Emission Regulations Could Jeopardize Multi Billion LNG Projects

Furthermore, I don’t even take into account whether oil futures are being manipulated (much like FX, GOLD, LIBOR – all have been either accused of or been caught in rigging scandals) along with every other commodity as a result of oil’s collapse and its financial impact. Related: The Next Fracking Boom May Be Closer Than You Think

Why regulators, and especially the media, refuse to address this, even in theory, and instead choose to perpetuate the falsehood of oversupply is beyond me. In the last two months, E&P equities fell 10 weeks in a row, which hasn’t happened since 1989.

To answer our own question on why this entire event is being largely ignored, maybe that oil is thought to spur higher economic growth as suggested previously. But so far that has yet to even materialize as U.S. GDP growth has actually slowed, not accelerated. Only time will tell whether this exaggerated move in oil, as well as its volatility, is justified or not. As reported here, the EIA has already revised lower, though only slightly, its prior month’s production forecast as we predicted. Look for more of this to come.

By Leonard Brecken of Oilprice.com

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Leave a comment
  • Richard on July 13 2015 said:
    Good Article Brecken very much appreciated!
  • John J on July 14 2015 said:
    It's as planned. Planned poorly. The idea was to limit production in Middle East (done mostly through war and civil unrest) while propping up shale in U.S. to imply security and volume. Now it's time to get Mideast pumping again as shale is done. It's all for US gdp growth and economic theory validation.
  • Keith on July 15 2015 said:
    I am very glad to see that at least one media outlet is highlighting this story. For me, it is a scandal that a government agency appears to have an agenda behind the figures.

    I have seen an article (copied in various places) pointing out that the financial problems of Petrobras (National oil company of Brazil) lead to a revised production forecast 1.4 - 1.8 M bopd less in 2019 than previously. Similarly budget constraints in Iraq have reduced forecast oil production by a similar number. Given that US, Brazil, Canada and Iraq are among very few countries showing oil production increases, the present misconception of the market is stoking up the next shortage.

    If there is an edict to overstate production to keep prices low as a tool of foreign policy (the present low price pressures Russia, Iran, Iraq, Venezuela) , one might consider that legitimate. However, I wondered if it had a party political angle. Questionnaires show Democrats are much more likely to believe in anthropogenic global warming than Republicans. Also, the "drill baby drill" approach may be considered more a Republican story as it supports Texas, for example. Is the EIA under instructions? The EPA has issued recommendations that hurt hydrocarbon based energy, and these have been challenged. Is the EIA doing something similar?
  • Keith on July 15 2015 said:
    Lower US production is also backed by figures on crude transported by rail from the American Association of Rail. These show that year-to-date 2015 is down 9% from Q4 2014. Canadian figures are similar. Yet the EIA reports increases in production.
  • Rick on July 15 2015 said:
    It's becoming a joke. Bullish EIA report and the media, few that cover it, spin as massive distillate buildup indicative of a growing, massive decline in demand. Why doesn't the Fed hold a press conference, inclusive of the other central banks, and state that from now on they will publish what oil and gas prices will be. Let's bury this fundamentals crap and admit the truth. Climate change policy makers are walking hand in hand with the central banks towards two goals: masking global economic weakness and the destruction of fossil fuels.

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