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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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U.S. Oil Glut Story Grossly Exaggerated

Recently, I have noticed that oil storage & production data (and media hype for that matter) has disconnected from hard data. This has been occurring for many quarters now with the US economy statistics as well and appears to be the new world order where facts can be spun or massaged to any one’s wishes.

It’s called the “age of propaganda” where truth matters little and comes out later in so called revisions. Take the recent spate of economic data points from the Kansas City Fed which said that economic activity not only stalled but was negative at -4 vs expectations of +1. The recent durable goods statistics also show contraction as well.

Yet we see the services PMI at a 6 month high. How can these divergences be possible? Well for one, some statistics are hard while others are estimated/massaged and others are seasonally adjusted or estimated (only to be revised later). In oil, the same thing appears to be occurring as we speak. The near record pace of oil storage additions in some weeks nearing 8-10 million barrels per day comes at a time when all indicators are that oil production is slowing. Related: Oil Price Speed Limit Presaging An Age Of Austerity?

Even using the EIA’s own data, production is up some 500,000 per day since October or 3.5M per week. So how can more than two times that be added to storage while gasoline demand accelerates to 5% year over year from low single digits? Refinery maintenance is part of it, yes, as well as seasonality as people drive less in absolute terms, so as production continues this would explain storage adds, but to this magnitude?

On a side note I was shocked to see that current storage utilization of oil isn’t even a record; unimaginable given that we are led to believe we are running out of storage! In any event, the seasonal effects will wane considerably in April into May as it always has.

CushingCapacity

According to the EIA, production is expected to average 9.35M bbd in 2015 up 700,000 barrels from 2014. Looking further, it expects the quarterly progression from 4Q14 to be 9.11M bbd, 9.35M, 9.44, 9.27 to 9.7 in 4Q15…..for week ending 3/20 production stood at slightly over 9.4M bbd so it appears production has continued to grow from 4Q14 right? Related: Weak Chinese Demand Could Undermine Entire Coal Market

To reiterate, the EIA has the difficult task of estimating all this using sampling and algorithms….it is not easy with actual data lagging behind by several months at least. This week we have seen major revisions to crude over rail from slower growth (high single digits to low single digits) to Union Pacific over the past 4 weeks seeing a 25% plunge.

Bloomberg had an excellent article on this so please read on for more details.

I should note that expectations were for the Permian in TX to offset the declines in Bakken, but the Union Pacific data does not corroborate that at all as it services many fields in TX. Further, even rail executives the past 4 weeks have said the pace of the fall off has been completely unexpected, but have we see any of that reflected yet in production forecasts from Wall Street, the EIA or IEA?

Thus we have markets using estimated production data to infer the pace at which storage will be filled up in Cushing, while the hard field data does not match. To compound this Mike Rothman, the founder of Cornerstone Analytics (NJ), has done probably the best work in uncovering the issue of “missing oil” and the game of demand under-estimations and then upward-revisions later. He believes the IEA has underestimated oil demand by a hefty 246 million barrels since 1Q14. The following charts summarize his findings:

DemandSeriesComparisonRelated: T. Boone Pickens Points The Finger At U.S Shale

Source: Cornerstone Analytics

IEAAnnualDemandEstimates

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He believes, eventually probably later on this year, that the IEA will revise demand higher – similar to what we saw starting in July 2013. It should be noted that this would probably be after oil prices have recovered and hard data has already proven the predictions incorrect. This game of revision after the fact isn’t new to the IEA, which has done it for numbers in 2012 & 2013 by a million barrels per day.

To summarize, we most likely have production being overestimated and demand being underestimated which may explain the “perceived reality” gap as it pertains to the “oil glut” and the real world. Thus, beware of government statistics that are estimated or seasonally adjusted (does anyone really believe we are at full employment, like we are being told by the Fed, as record numbers of Americas are being dropped from the work force to boost unemployment stats?) because they will likely get revised when hard data irrefutably gets reported and the crisis has passed or when you are no longer paying attention.

By Leonard Brecken for Oilprice.com

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Leave a comment
  • Doogie on March 29 2015 said:
    Thanks for the great article.

    So storage capacity has gone up 50% in the past four years. Somebody was thinking ahead, unlike the bozos in the Obama administration. All the E&P companies in the US and Canada deserve all of our thanks.
  • Dan on March 30 2015 said:
    Hi Leonard, your link to the 'Bloomberg article' seems to be incorrect as it goes here:

    http://finance.yahoo.com/news/north-american-palladium-announces-end-110000015.html
    can you please update?
    As regards your article, it is clear that the increase in US inventories is not any direct result of US production, as it would be very easy to reduce imports to counteract the US increase. However why should refineries stop importing when it is to their advantage to keep on importing oil at low prices, scare the market and allow them to benefit further from the 'fear factor' of overflowing storage tanks which in turn causes even lower prices? Their increased inventories will not be released to the US market when WTI is in the $40's and I am sure they will push up the prices of finished products and use their cheap oil to feed their refineries and thus make even higher margins.
  • andy on March 30 2015 said:
    You should read the news more carefully. Additions per week to the Cushing storage are reported in barrels and not barrels/day. In light of that you might want to rewrite your article.
  • Dan on March 30 2015 said:
    Great article with some factual data on the slow down of crude production, and the issues with IEA's numbers. Also thanks for the Cushing numbers that dispel the eminent issue of Cushing being filled to capacity.

    Your link to the rail car declines was very useful. The 25% decline for the Permian was very significant compared to the lesser decline in the Bakken. Regardless, there is going to be a wake up call for crude prices in the 2nd half of 2015. Great article again.
  • Bill on April 02 2015 said:
    Though i wouldn't doubt demand has picked up a little especially with the colder than average North east winter. But I have to think the Author is more Biased than the press and has a vested interest in seeing Oil price rise
  • Brad on April 02 2015 said:
    Great Article. I also cant either side of the equation to add up. When you take tight oil and basically consider the 40% reduction in horizontal rig count X the tight oil production it shows a 3Q production averaging more like 8.2 M bpd. A drop of also of 500,000 barrels per day by June to 8.9. Demand historically shows 5% increase after only 6 months and high single digits after one year. I was wondering where the disconnect was and your article is very helpful. Especially the railway info. thanks.
  • animus on April 04 2015 said:
    The media no longer do real fact checking by going to the sources of estimated data. They rely on organizations like EIA to tell them. They never question the information against facts. Most of these organizations have become political outlets to re- enforce what the government wants you to believe. The economy is anemic at best. Jobs may be there but most are part time because employers do not want to pay for Obamacare. The sad fact is this has hit some of the biggest companies, which now hire you a a contractor on a program. This gives them to ability to not have to provide benefits. They pay you a salary and you buy all your healthcare and IRAs. It is best to go by the philosophy to " believe half of what you see and less of what you hear" particularly from our government.
  • thecrud on May 02 2015 said:
    If it were not for those Obama Bozoz we would still have the crashed banks housing jobs and dow we had under republicanism, And not using a drop of oil. Doogie.

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