"The numbers in this report can't be right -- and yet the market is reacting to them!" -- there's a complaint we've heard so many times about USDA reports, but this time it's the oil industry and the weekly government crude oil inventory report that's in the spotlight.
Brian Baskin, reporting for the Wall Street Journal last Friday, used internal Dept. of Energy documents to uncover what he said were errors in the Energy Information Agency's weekly inventory report, "including one (last) September that was large enough to cause a jump in oil prices, and a litany of problems with its data collection, including the use of ancient technology and out-of-date methodology, that make it nearly impossible for staff to detect errors."
The EIA has been releasing its weekly inventory report on Wednesday mornings since the early 80s, and, like USDA's weekly export sales, inspections, crop progress and crop production reports, the report is "a major event for oil markets."
EIA "collects data from thousands of facilities, all reporting the number of barrels held in storage around the nation. But many of its systems haven't been updated for 30 years, and much of the data input is done manually, according to one report commissioned for the EIA, prepared by consultants SAIC Inc.," Baskin stated.
EIA's director, Stephen Harvey, told Baskin he wasn't surprised with the findings. The SAIC report concluded that EIA faces an uphill battle just to maintain its current level of accuracy, although Harvey said the agency has put in place some changes despite the lack of funding.
The current version of the 2011 fiscal budget includes $18 million in additional funding requested by Energy Secretary Steven Chu for the EIA, the WSJ said.
For some perspective on the WSJ piece, DTN Refined Fuels Editor Brian Milne and DTN Senior Analyst Darin Newsom shared the following sentiments, "there has always been a question mark around the EIA weekly reports. Some will look at the interrelation of data, i.e. weekly output, imports, implied demand and the stock change, and say, that doesn't add up. There's also a big sigh when the EIA does make a revision. "This news will definitely trigger cynicism.
"However, the data remains the best public information available. The EIA was created 32 years ago to provide some sense of transparency in the market. The event that triggered its creation was the OPEC's oil embargo to western nations in the early 1970s.
"Absent the EIA data, small companies that don't have the resources to mine all of this data would need to trust what the big companies tell them. Before the EIA was created, the big companies knew what was going on, but the little guys and the government were clueless.
"Every good analyst knows that a week's worth of data does not make a trend. The problems found internally and with the assistance of the consultant shows more caution should be administered before putting on a trade solely based on the results of the weekly data.
"Bottom line; the data will remain a critical component in oil trading."
The WSJ article raises another question for DTN Senior Analyst Darin Newsom. Newsom said, "I just don't buy the argument anymore that small commercials or traders are at a disadvantage to larger entities, relying on them for information. I hear the same thing all the time in the grains as well. The fact is that in this day and age of instantaneous information and heavily traded markets, market information is available to all.
"I don't think EIA reports hold any more influence over long-term energy traders than USDA reports do over grain traders. I think the large money has moved well beyond these reports, realizing they are as faulty as the article reports. That is one part of the evolution of the markets that is actually in the right direction."
Milne is not swayed by Newsom's argument. His response: "Question though; how does government set energy policy void of data? Realizing that the article is critical on the weekly reports, the EIA does a great deal of long-term projections and studies. Data is not confirmed for months later, and those surveyed for the information, including weekly surveys, face large fines or worse for falsely reporting data.
"The amount of energy consumption is critical to know when setting a broad array of policy impacting all arrays of business as well as environmental issues.
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"And how do you have transparency without a supply base of information? That transparency would dry up as quickly as Lehman's assets ahead of its failure in 2008.
"Until all trades including OTC are cleared on an exchange and reported in real-time, the market's prices could be swayed by those armed with information. The small guy would be at a disadvantage in oil trading absent some public or reliable third party source of data. Absent the reports, the data sources would be the oil majors and the big investment banks.
"If anything, the article argues for more resources to get this correct. It can't be just about trading; that's been gamed before."
By. Energy Hedge Funds
