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Is OPEC Too Bullish On China's Oil Demand?

Is OPEC Too Bullish On China's Oil Demand?

China's oil demand growth is…

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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EIA Reports Bizarre Increase In U.S. Oil Production

EIA Reports Bizarre Increase In U.S. Oil Production

What did I tell you? The EIA has done it again.

First, it is important to remember that weekly EIA production numbers are just estimates (except for Alaska, which is near real time). For the week ending on May 22, the EIA reported a monster increase in production of 3 percent from the week before; way above what has essentially been a flat trend line for several months. On an inventory basis, crude stocks fell over 2 million barrels versus a 1 million barrel gain from the API inventory report. The main culprit, which was the reason for past stock gains, was a fall in imports as well as continued strong gasoline demand as refiner’s ramp post seasonal maintenance. Related: Which East African Nation Will Win The LNG Race?

I warned oil enthusiasts that EIA numbers are very suspect and this latest game just shows you how suspect they really are. After production flat lining around 9.3 million barrels per day since February, even declining a bit in recent weeks, last week the EIA says that output jumped by 300,000 barrels per day? And out of the blue, they decided that the March baseline should be raised 130,000 barrels per day (Bbls/day) (“based on what?”, I ask) and then decided to estimate another 75,000 Bbls/day for the week ending May 22 (again, “based on what rig count?”).


Related: Iraqi Oil Sector Shrugs Off ISIS Threat

True, Alaskan output climbed 95,000 Bbls/day after falling quite a bit the week earlier and this figure is probably accurate. However, after I and others have repeatedly called out the EIA for over estimating output and underestimating demand, what do they do? Magically revise figures higher at the perfect time when prices are being beaten down by Goldman Sachs and others as the economy slows. And, as a reminder, this comes at the time when the US government decides that the seasonal GDP adjustment needs to be adjusted again to better reflect growth in the economy. Also, let us not forget what all the rail data showed in late winter: that production is slowing, not going up.

What is disturbing is that the EIA continues to do the opposite of what hard indicators are saying by revising production up instead of down, a move that I had expected. I will admit that in the first quarter of this year E&P companies did show marginally better output in their quarterly results, although not by a huge amount. But the fact is, no hard evidence exists to justify these revisions that go counter to the physical data such as rail figures, rig count, depletion etc. Remember, production numbers are just estimates. And the EIA actions come at a time when fudging via Related: Coal Facing Worst Year Yet in 2015

government agencies appears accepted as the norm when it supports policy.

In the end, the most important takeaway here is that there wasn’t any surge in output in May, but simply math games at the EIA.

By Leonard Brecken of Oilprice.com


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  • Mike Dedmonton on May 29 2015 said:
    While I believe the EIA does a very credible job providing information and making it freely available to everyone, I did wonder about the numbers at time. The one in particular is the Adjustment Number, which I would describe as a number for error correcting. I would have expected this number to hover around 0, but it had been showing a distinct positive bias this year (it appears to have a slight positive bias previously in 2014 if memory serves me). This showed they were missing some oil, ~ 300 kbblpd most weeks. Since the market is reacting to inventory, it was probable that they were missing some of the production.

    One area they admitted having problems was tracking crude by rail, though EIA recently noted they have improved the quality of the data from this source.

    I believe the EIA could use Leonard's skills to help improve the data. Clearly he has depth of knowledge in this area, and I think it is irresponsible of him not to share this talent with the EIA.

    I also believe it will help with Leonard's current employers need to facilitate the oil price upward, if he can demonstrate to the EIA your marvelous skill set in data capture and analysis.

    Another well researched and argued paper from this author.
  • Karl Yong on May 30 2015 said:
    I believe both this 2 oil stocks, Exxon and Shell, will be able to continue to generate their dividends despite oil price:-
    1) 1Q 2015, both did well in term of covering loses from upstream by optimizing down stream.
    2) Exxon and Shell have huge refineries set up in addition to their upstream, plus shell LNG venture will benefit them greatly after present issue blow over.
    3) I doubt the oil glut is real, as report 13 shale rigs down this month, despite some report only 1. Saudi and other pumping all time high is real, because vessel price for delivery has increase more than 50. My doubt arises from:-
    A) I learnt during my chemical engineering study, "bottle-neck", no process can just increase production without suffering from limitation or bottle-neck from part/parts of it process. Example in this case delivery vessels, super oil tankers are limited, in view of increase in output and demands, no ship owners will let their ship stand still to be storage.
    B) Reported repetitively, China had asked for increase in volume in addition to the contracted volume, it has been continuously rejected.
    C) If US can produced so much oil from Shale, why it remain as one of the biggest importer? It is also a fact that the US government booked in 60% of oil in their reserve from oil that is still in well. Remembering shale rigs drop 2/3 from last year.

    I only believe the glut is a plot by US to activated a price war against OPEC to ease the potential shortage because of the situations with Russia, Iran and Iraq. They need OPEC and the rest to keep pumping more, to ease potential oil shortage.

    Anyway regardless, oil glut true or false, refineries take years to construct, example Shell took years to placed a new one in Singapore. Hence even upstream is floated, downstream is limited, hence I picked Exxon and Shell as a long term dividends providers for the portfolio. Personally I still believe they are better than most bonds and mutual fund, the shares can be liquidated quickly in the market if there is an emergency, plus the potential upset once the price war end.
  • John Scior on May 31 2015 said:
    I am not sure how much a factor this is or not but am I not correct in that oil is but one product of the fracking situation. I was under the belief that facking all started in search of natural gas which at its beginning fracking for gas was highly profitable due to the high price at that time. I wonder what analysis can be done to determine the combined resource retrieval from wells because much of the analysis I have seen thus far concentrates only on the oil price portion of fracked wells. If say the two resources are being economically recovered , it might alter the pint where new wells cease to be drilled for the sake of breakeven point in recovery costs. Also, I believe that the value of a dollar has changed due to the cessation of Qe so that the perceived value of a dollar was seen as being diminished due to an expected hyper-inflationary period. Now that the Fed is anticipated to raise rates and the value of a dollar is going up in relation to its purchasing power, perhaps well frackers new to the game or who purchase equipment at discounted prices, might be able to monetize the opportunity of laid off workers and a deflationary cycle that would allowthem to capitalize on unused equipment and resources. In essencethe breakeven point might come down to say an oil price of 20-35dollars if new players replace old players and they recover more natural gas which is sold to the market instead of being flared off. See in reference : http://pioneerenergy.com/products-services/mobile-alkane-gas-separator-mags/
  • tim beresford on May 31 2015 said:
    were do you think isis sells its oil ,, their a front group for the americans ,, ie the banks ,, it aint a surprise to me ..
  • Keith on June 08 2015 said:
    Many authors like to overlay the plummeting rig count with the bogus EIA estimate which claims production is still rising in March. The overlay of the curves has been overstated.
    First, there is probably a 3 month lag between drilling and completion in Eagle Ford and Permian and up to 5 months in the Bakken. However, that may be misleading because data shows that completions of wells have been falling as fast as rig count.
    Second, the biggest complaint is that the production curve comes from the EIA which uses an algorithm rather than measurement. There is lots of other evidence to suggest tight light oil production is already declining, such as data from the DMR in N Dakota, and the TRC in Texas. What the EIA does acknowledge is that decline from legacy wells has reached 347000 bopd per month. In other words, just to keep production at the same level, the industry has to replace 347000 bopd per month. Using extensive data on first-month production per new well, in order to replace legacy declines, the industry needs to drill between 70 and 90% of the number of wells it drilled in 2014. Whatever efficiency gains may have occurred over a few months, that is impossible with a fleet of rigs that is only 40% of the number operating in October 2014. To think that the EIA production numbers are realistic is magical thinking.
    Thirdly, as alluded to above, petroleum transported by rail as given by American Association of rail shows a different story. Crude transported by rail is mostly from Bakken. May 2015 rail transport is down 13% from December 2014. The implication (if new pipeline alternatives do not exist) is that light tight oil production is already down 13% from the peak in December 2014. Assuming similar declines for the main frac plays, US tight light oil production is now down 470000 bopd from the December 2014 peak.
    If commenters were realistic, and highlighted the fact that Light Tight Oil production is already on the way down, then the market would be more likely to balance more quickly. This will ultimately be good for the frac industry, because they need a higher price than present. If you promote the idea that a 60% reduction in operating rigs has had no effect on production, the oil price will stay low for longer, and frac companies will suffer more pain than they already are. If you do not think they are suffering pain, then why have they as a group issued $150 Billion more in debt over the last 4 years?

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