We are in an age of propaganda where most people argue viewpoints not based on facts but on selective perception basis. They cherry pick what supports their argument then ignore the rest to make their case. Facts are no longer weighed objectively and in some cases ignored altogether. This has been going on for years as the “talking heads” come on TV and talk about various things and positions they own attempting to sway others to buy or sell based on a TV appearance. Well what has occurred the last 6 months when the steep decline in oil occurred went one step further.
Yes the move down from $100 to $70-$80 or so was tied to the oversupply that was anticipated to come and has come mainly in the US. Beyond that, most oil industry executes would agree, as have various members of OPEC, that the decline from there was tied to media hysteria that created a negative environment to force an unwinding of long futures positions which ballooned to 5-8X higher than 2008. Related: T. Boone Pickens Points The Finger At U.S Shale
Post OPEC’s November decision, the media has been basically cheerleading oil down. Most know that the media has a liberal bias so naturally anything that helps in carrying out the Feds policy would naturally get supported. We all know the primary mandate of QE1-3 has been to prop up the stock market thereby creating the wealth effect. Well one thing that supports this is consumer spending so the media for months now has run article after article about the so called “oil glut” and still to this day, despite being 9 months into this down turn, is refusing to admit that lower oil did not result in higher consumer spending. At Bloomberg in their energy section they used “glut” in their headlines almost daily in January.
In recent months the US economy actually has slowed not accelerated. Further, what has accelerated is gasoline demand, to 5% plus since December here in the US, which most don’t even realize. But Fed officials even this week keep saying oil is a net positive while most economic indicators (latest is durable goods which is negative in January and February) ex new housing starts recently have stalled as the media still cheerleads on. So the media, with help from select Wall Street analysts/brokers (one well known that I won’t name but on the Street is noted for its bias) create a negative bias whereby most positive indicators of improving supply/demand ratios are dismissed and thus don’t get discounted.
One primary one has been the near 50% drop in rig count and the other the 30% plus decline in US capital spending on oil exploration. At first we were told only vertically rigs are being dropped which weeks later turned out to be 100% false as now the majority are horizontal. Then we were told only the less productive areas saw the majority of rig count drop and production won’t get reduced because of productivity gains in more productive areas from existing wells. This Kansas City Railroad confirmed once and for all that oil over rail is declining (Reuters in fact last week reported a 25% drop!) which is rather telling given that the Bakken primarily uses rail to move crude from wells. Related: Oil Price Speed Limit Presaging An Age Of Austerity?
Further, 90% of active rigs are in 3 counties in North Dakota as of 2 weeks ago yet we continue to see rig counts fall. In fact, rigs according to the North Dakota Resource site have declined week over week again from 107 to 98. So is the spin that rigs are falling in only non-productive areas and production won’t fall but grow through most of 2015 true like the EIA an IEA claim? No, of course not, in fact the EIA caved somewhat by admitting that production in Bakken & Eagle Ford will fall BUT rise in Permian offsetting it resulting in a production increase this month. Well, let us see if that is true.
As a reminder, the EIA uses sampling and algorithms to estimate on a 3 month lag when actual data gets reported US oil production. The point is that the rig count drop isn’t the focus (selective perception created by media basis) any longer despite falling nearly 50% from peak but instead, the focus has now shifted to Cushing hysteria and on it possibly filling up in next 4-6 weeks. Back in 2009 when the rig count dropped, the case was made that it resulted in little production curtailment, but what they failed to declare was that by that time the bottomed oil price recovered, so things like depletion on existing wells didn’t have time to kick in. And back then the same focus was on most productive wells too, but the penetration of horizontal drilling much less so, allowing for more ‘apparent’ productivity gains.
However prices aren’t recovering so why shouldn’t rig count be a leading indicator now, as it always has been? To review, since January we went from “rig count does not matter” tied to “wrong rigs being dropped” to “wrong regions’ rigs being dropped” and now “rig count being dismissed altogether with all the focus on Cushing filling up?” Meanwhile production grew 500,000 BB/D since last October or 3.5M BB/W and we keep adding more than a 2X that to inventory and no one questions how or why, when gasoline demand has accelerated not decelerated (as media focuses on waning China demand & now Iran supply mind you). In a bear market created by media hysteria & bias all the negatives matter and none of the positives as you can see. Related: Wall Street Losing Millions From Bad Energy Loans
The selective perception can all be measured through the relationship between the US dollar and oil which has had a near perfect inverse relationship since oil began to fall in late June 2014. Since last Wednesday the UUP is down 3% while USO is up nearly 7% for a little over 2.33X inverse move. However over the last 3 months it was 2.7X and 6 months 4X. Thus, as the dollar’s ascent decelerated and reversed, the relationship lessened.
The lesson here is, don’t get pulled by the nose by selectively perceiving what the media wants you to focus on when the reality is very different. Rig count has always been a leading indicator for oil supply, in some cases more and in some, less. Back in 2008, gains on horizontal drilling helped offset the rig losses as did the rapid price rise toward end of 2009. Everyone has a bias and the secret is to figuring it out in order to remain objective, thereby resisting the selective perception. Most don’t even realize this until someone points it out as they are led like sheep. The reality is US oil production is about to level off and decline in early summer into the fall and Cushing won’t fill up yet but I don’t here the cry for this case at all in the media.
By Leonard Brecken for Oilprice.com
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