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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 An EIA Invention?

U.S. Oil Glut An EIA Invention?

In the latest weekly production data from the EIA, on the back of recent March revisions, the U.S. managed to post a 76,000 barrel per day increase in the lower 48. Production from Alaska fell by 61,000 barrels per day, putting overall U.S. output 15,000 barrels per day higher for the week ending June 12 compared to the previous week. 

This comes at a time when multimillion barrel draws have become the norm. It is important to note that lower 48 production is estimated based on an EIA black box model, while Alaska is virtually real time data. That suggests that the weekly supply estimates are hugely overestimated. 

These weekly supply numbers are then used as a basis to jump to the conclusion that the markets are suffering from too much supply. As stated on OilPrice.com many times before, the amount of “over supply” vs. the averages in the U.S. according to the EIA amounts to tens of millions of barrels of oil.

I continue to maintain that the EIA revision to production came very suspiciously at exactly the same time inventory draws began, as did the “Miscellaneous to Balance” figure used in calculating inventory. The chart below clearly shows when this figure started to grow and by what amount. It totals more than 30 million barrels since April and has been rising, which is virtually all of the oversupply above the mean in the U.S! To reiterate that number is at discretion of the EIA and is not an actual data point but an “adjustment.” Related: The Growing Sino-Latin Energy Relationship

Data Errors Have Real World Consequences

This figure, as created by the EIA, has (with the media’s help) created the impression of a huge oil glut in the U.S. market. No one, either within the media or the industry, has asked for clarification of this number and it is instead taken as gospel. This is now wreaking havoc in energy states such as Texas, as well as threatening most oil companies as well as tens of thousands employed within the oil and gas industry. With such importance placed on a number which has impacted not only billions of dollars in company revenue but many lives for the worse, how can it be largely unchallenged by all but a few in the media?

Whether this is tied to sheer incompetence or some other, more sinister reason, the number should be as accurate as possible. The consistent errors put the vast majority of small E&P companies at risk. The EIA, at its sole discretion, has had the power the dramatically affect the sentiment and prices of an entire industry and in some cases completely obliterate it. The magnitude of the errors is mounting by the day as are the consequences. Related: Texas Production Down, Gas Takes Biggest Hit

Natural Gas

On a separate note, one has to wonder about the goings on with natural gas prices given that they are holding at only 10 percent above their yearly lows. Stocks, as reported this morning, are still healthy at 1.4 percent above their 5 year average but this number may be a bit misleading.

Demand tied to coal switching is quite frankly soaring and is at record highs. To reiterate, this comes at a time when natural gas production is poised to decline. One of the largest natural gas producers in the U.S., Chesapeake Energy, is expected to start seeing 5 percent declines in 2016 production according to UBS, as Free Cash Flow (FCF) continues to be hugely negative at nearly $3 billion through 2016 as debt/EBITDAX (Earnings Before Interest, Taxes, Depreciation, Depletion, Amortization and Exploration Expenses) soars to over 5X. 

This comes as hedges roll off in 2016. With FCF being negative throughout the group, the problem starts to look like a serious issue. There will come a day of reckoning when capital expenditures dry up as demand continues and the data distortions on estimates finally become clear to the markets. Related: How Driverless Cars Will Upend Energy Markets

It won’t be pretty for prices down the road and it will come as a result of capital budgets getting slashed based on artificially depressed prices. When this occurs everyone should re-read this article as I’m sure the cries from soaring prices will become very loud. The E&P space won’t be the cause but the victim in all this. Data distortion by government agencies has serious consequences on capital investments.

(Click to enlarge)

Source: Cornerstone Analytics

By Leonard Brecken of Oilprice.com

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  • Rushabh Shah on June 25 2015 said:
    Yes!!! Someone actually gets it!!! The EIA models don't take into account the large production declines that come from shale oil fields. The market is treating shale oil as if it were conventional oil production. This means that when the market wakes up (which it will when the real oil production figures are made clear) I am going to guess that oil prices will go right back to around $100 a barrel and probably even higher in a fairly short period of time. It will do this because low oil prices have curtailed E&P projects, and cause a decline in oil production currently and for the future, putting pressure on prices. We also have to remember that the entire globe has increased their consumption of oil due to the lower prices. E&P expenditures have been soaring since 2005 since conventional sources of oil production are becoming harder and harder to find, why else would shell go looking in the arctic for oil?
  • Stavros Hadjiyiannis on June 25 2015 said:
    The US deep state is hell-bent on inflicting damage to Russia. Not even the sacrifice of the US oil sector itself is too high a cost in the pursuit of this most strategic imperative.
  • Jim Thorp on June 25 2015 said:
    Leonard, I enjoy reading your articles very much and totally agree with your logic. Yesterday's 76k BOPD increase from the EIA makes absolutely no sense. Being a royalty owner and non-operator in multiple wells across many of the major U.S. oil and gas basins, we certainly are not witnessing an increase in production. Maybe we are participating with the wrong operators, but I doubt it.

    What really bugs me along your same lines, is how the EIA and many followers write that our US oil storage is at an 80 year high. Who was tending to the books in 1935? Plus, isn't days of supply a more important metric?
  • Graham on June 26 2015 said:
    Well said sir.
  • Jeffrey J. Brown on June 26 2015 said:
    I would also point out that what the EIA calls "Crude Oil" is of course Crude + Condensate (C+C). When we ask for the price of oil, we get the price of crude oil with an average API gravity of less than 40, but when we ask for the volume of oil, we get some combination of crude + condensate + natural gas liquids (NGL) + biofuels.

    I suspect that late last year US refineries hit the limit of how much more additional very light crude (roughly 40 to 45 API gravity) and condensate (45 +) that they could take, if they wanted to maintain their distillate output. Therefore, I suspect that most of the build in US C+C inventories has been very light crude and condensate, with very little, if any, build in 40 API and lower crude oil inventories.

    A few weeks ago, Reuters ran a story about US refineries increasingly rejecting "Synthetic WTI" blends of heavy oil and condensate because the blends were deficient in distillate output.

    In addition, it's very likely that actual global crude oil production probably peaked in 2005, while global gas production and associated liquids (condensate & NGL) have so far continued to increase.
  • Lenb on June 27 2015 said:
    Thank you all for your comments and standing up to the soft tyranny thats afoote!
  • Michael on June 27 2015 said:
    It's all a big game of limit poker. Several players are on their last chips, others on tilt, there are deep stacks that feel untouchable. The media broadcasts all the chatter from each of the players at the table and the media assumes that they are all being honest with every word; Goldman, Citi, BP, Continental, they all hold a hand they want to maximize.

    The EIA is meant to be like the statistician, just reporting the numbers for all the spectators. Unfortunately, they are just taking a guess but people assume they have all kinds of accurate information.

    Here are the facts from my perspective:

    * The industry overshot production and price responded
    * The decline curve is real, and we didn't just discover technology to overcome it
    * The industry will likely overshoot again
    * Production will likely come back online from Libya, Iraq and others
    * Demand is growing
    * Old metrics are becoming less useful
    * Nothing stays constant.If all facts are known by everyone and an undesirable outcome appears certain, then it becomes much less likely to be certain given enough time.
  • Mike Dedmonton on June 27 2015 said:
    Another ...interesting article. Definitely, the EIA is not perfect. Back in Jan - Mar time frame, the adjustment number (you know, the number they use to balance the reports) had a strong positive bias. A typical report may have had an adjustment number of 400 kbblpd - some were even more. The EIA numbers were not accounting for crude by rail adequately, and recent reports are now typically less than 100 kbbpd in the adjustment number.

    Some interesting comments made on the article. Shale oil wells did show rapid declines, but it appears economically attractive to go and restim old wells to enhance production. No doubt the $ 100 oil allowed less efficient rigs and operators to survive, so I doubt we will return to the same rig count. Sounds like producers have become even more efficient drilling and producing wells with the surviving rigs, so why bring back the others?

    I would agree that shale oil is more like condy, and its good for gasoline but not so great for higher end cuts. The US will still want imports and as the US is producing near flat out, so is the rest of the world. Simply increasing imports back to last year's levels will make sure no one goes starving for fuel.

    BP recently said global energy demand has peaked, so I doubt there will be a shortage of oil. Then there is Paris - but most people in the US don't want to believe in global warming.

    Oops, getting off topic. So those "questionable" production numbers over recent months must have been compared to actual data. Seems the EIA had under reported lower 48 production - doesn't that bother the author just as much?
  • Brian on June 27 2015 said:
    Excellent article as always! Thanks Leonard.

    One thing I have been noticing over the past couple of months, after analyzing the weekly report. A couple of things jump out at me. First off, we have had stockpile decreases for the past two months running. Several times over the past couple of months, we have seen large increases in Imports, large increases in Input to Refiners, and large increases in Domestic Production, all on the same report that shows a stockpile decrease! How in the world is that possible? All three of those factors should Increase the stockpile, not decrease it. So, my question is, how in the world does the EIA show a decrease in stockpiles after reporting Increases in Imports and Domestic Production, and decreases in Inputs to Refiners? And of course this is where that "miscellaneous to balance" seems to come into play. None of it seems to make any sense. I believe strongly that actual domestic production is falling, and the EIA (for whatever reason) is not reporting it.
  • Brian on June 27 2015 said:
    As a side note, the EIA reporting that production in the Lower 48 went up by 76,000 bpd this last week, but at the same time, they reported production in Alaska going down by 60,000 bpd, and that is on top of a 31,000 bpd drop the previous week. That is a drop of 91,000 bpd over the past two weeks, just for Alaska, and that is nearly 20% of Alaska's daily production, down in the past two weeks. With Alaska being nearly real time, I think this the is the figure that we should be focusing on, and not the Lower 48 production that comes from the EIA via Ouija Boards, Tarot Cards and Crystal Balls. Well, we will see what the Fortune Tellers come up with for Lower 48 production this week. Should be interesting!
  • Amvet on June 29 2015 said:
    It was reported that 60% of the surge in US stored oil came from a surge in US oil imports. The surge in US stored oil was used to claim that US oil production had surged so that production-consumption was unbalanced.
    I smell a rat.
  • krill66@yahoo.ca on July 06 2015 said:
    It is a commonly held belief that a sure fire way to go broke in the markets is to bury yourself in the news. This is, of course, how it must be.....

    Everyone wants to buy low and sell high, but obviously if some are buying low there must be others convinced that selling low is the "smart" play....to avoid even bigger losses. Investors have poured billions of dollars into financing the shale oil revolution. And just when they thought "maybe now I'll profit from my investment" what happens? BAM....a massive glut of oil on the world markets.

    I'm one of those who believe there are three kinds of lies.

    1) Lies
    2) Damn lies
    3) Accounting

    I'm convinced that we're going to see oil shoot back up. When? I have no idea, but those selling E&P plays now in my opinion will be kicing themselves for years to come.

    Great article...glad I found your site.
  • Keith on July 14 2015 said:
    Exactly. I have felt for ages that the EIA numbers are wrong. They even produce 3 different estimates from 3 different reports by the same agency.

    The higher-than -real reported numbers are bearish for price, which as you point out means the market is not perceived to be balancing.

    This is negative for fraccers, conventional E&P, Russia, Iran, Iraq and other producers who do not have the currency reserves of Saudi, Kuwait and UAE.

    However, is it also party political? Is the "drill baby drill" view a more Republican approach? It certainly helps Texas. A much higher percentage of Democrats than Republicans believe in anthropogenic global warming, and so hitting the oil industry may well be pro Democrat. I do not live in the USA but I would like to know why it is this way if I was a US citizen.

    Other US government agency numbers are under scrutiny. For example the EPA regulations hurt coal, but have been questioned in court. The National Snow and Ice Data Centre claims Arctic ice is at its 3rd lowest, when in fact it is as high as it has been over the last 10 years. The EIA numbers need investigation too.

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