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.
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:
Source: Cornerstone Analytics
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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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. More
Comments
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.
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.
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.