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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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Here Is Why Predictions For Lower Oil Prices Are Wrong

Here Is Why Predictions For Lower Oil Prices Are Wrong

Once again, we wake up with markets reacting more to macro data versus fundamentals, Goldman Sachs reiterating its bearish call on oil and the EIA back tracking on its data (again). Firstly, all asset classes tend to react to central bank moves and/or macro data more so than actual fundamentals. The weaker dollar, in particular, has created more swings in oil than any other macro factor in recent months. My view is that the U.S. economy, despite a plethora of excuses for weak GDP figures in the first quarter, is poised to underperform on a relative basis, especially when compared to Europe. The short term reaction to quantitative easing (QE) boosts to economic growth has been proven here in the U.S. and is now playing out in Europe. But just like here, the effects will only be temporary.

Here in the U.S. we have a structural problem with a declining standard of living as wages stagnate and under-employment continues. Higher paying jobs aren’t being added at nearly the pace of other recoveries and politicians are attempting to mask the wage problem by boosting employment at the lower end of the pay scale. Related: Oil Markets Have Little To Fear From Iran For Now

In any event, it appears the U.S. dollar is poised to weaken despite the Fed’s numerous threats to raise rates based on sketchy economic data. My view is that not only will rates not rise but it’s becoming more likely that QE4 is on the table. As I said before, if you’re an oil bull, that’s exactly what you want to hear despite the media acting as the mouth piece for the Fed by talking rates up. Thwarting equity price bubbles seem to be the motivation here on rate threats, but a real increase is probably off the table.

Now let’s turn to the “less relevant” fundaments.

According to Cornerstone Analytics, demand for oil is accelerating in April, up almost 3 million barrels, and on top of waning production, this is also bullish news. The hints from producers from first quarter earnings calls is that oil breaching $70 will signal higher production down the road later in 2015. That means the Goldman Sachs call has some merit. I can see caution on prices rising, but to continue to call for prices to fall is simply ridiculous. Related: Oil Rigs Down Almost Universally

Recall one of the premises of the EIA’s earlier predictions on continued supply ramps in 2015 was the assumption that production via Permian and Eagle Ford would continue. But as the EIA apparently now admits, that premise was way off: the EIA just issued a new forecast that called for big declines in production for the month of June.

The Eagle Ford will see production fall by 47,000 barrels while the Permian may rise by a meager 7,000 barrels per day. Further, the Bakken is expected to decline 31,000 barrels per day (I have predicted in the past that declines were coming there). Overall for June, U.S. production will fall some 86,000 barrels per day; far steeper and faster compared to prior expectations. Overall, the false premise of the global markets being over supplied by some 2 million barrels per day is greatly exaggerated, especially when considering that demand will probably be revised higher in the coming months. Related: Saudis Snub Obama Over Iran Deal

On the natural gas side, the EIA expects production to reach 46.19 million cubic feet per day (MMcf/d) in the major shale plays in June, a decline of 112 MMcf/d from the month before. That’s a big change particularly when inventories are still below the 5 year average. Output declines in the Eagleford and Bakken will lead the way, offset somewhat by Marcellus and the Utica, which will experience its slowest increase since early 2014.

These downward revisions come on top of previous changes to forecasts. Shale gas regions will experience their first declines since 2013. The EIA continues to be overly optimistic about production levels, and it has been forced to constantly dial back its projections.

We have seen it all before, but the markets and the media are missing what is really going on with energy fundamentals.

By Leonard Brecken of Oilprice.com


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  • Mike Dedmonton on May 12 2015 said:
    This article is littered with a bunch of unsupported assumptions. Maybe the USD will weaken, but on what grounds? Would further QE cause it to weaken? Is demand really that great? If April demand is up 3 million barrels, then that is roughly 100 kbpd - its increasing, but considering the EIA adjustment figure is 300 kbpd and production is still well over 9 mbblpd, I wouldn't call this a significant increase.

    The EIA drop of 86,000 bpd in June may be significant, if there wasn't the possibility that higher prices will incentivize producers to bring on some of the previously drilled wells. Alternatively, OPEC or Russia, who are still producing at maximum production rates, would love to help overcome any shortfall (I think Imperial is bringing on another 20 kbpd of bitumen - maybe that will help any shortfall).

    The author then suggests that there is no overproduction of crude or at least at an insignificant rate. I don't think the EIA or IEA would agree. Its hard to understand why there isn't overproduction if all the major producers are running at max production.

    I was wondering how this author came up with these conclusions, until I read in his bio that he is employed by a hedge fund. Its been noted that a lot of hedge funds have long positions in oil.

    I believe oil should be shorted and this article has brought nothing to indicate otherwise.
  • Graham on May 13 2015 said:
    Perhaps the most level headed assertions in this current environment. Check out his piece on media bias driving down the oil price. Great read.
  • Rick on May 13 2015 said:
    Leonard, nice article. I guess the shorts aren't reading your articles or those by others that point out the concerted effort by the media and those such as the gentleman above to spin prices lower. One point they seem to miss is that shale production has a very different depletion curve. Those ducs they keep pounding everyone over the head with aren't going to add near what they think. I'm not a hedge fund guy just an oil guy, and conventional at that, but a rude awakening could be right around the corner, particularly when ACTUAL, not modeled, production figures come out. Another point, unless WTI averages about 52 a barrel, that tax incentive for completing all those ducs in the Bakken doesn't kick in. Guess they'll cover that one up too.
  • Mike Dedmonton on May 14 2015 said:
    If I was long on oil, I don't think I would use this article to support this claim, as there is very little actual substance to it (I day trade, but have a bearish sentiment for oil).

    There has been this assumption that shale wells quickly deplete, and there is hard data to support this claim from the early wells. However, the shale industry is relatively new and producers are finding ways to extend the flush production longer or to rework a well to stimulate production. I believe the EIA has data to support increased productivity from shale wells. The most recent US production numbers for the lower 48 increased by 10 kbpd this week, suggesting the expected decline rate is not happening (I know previously a few weeks ago that a 20 kbpd drop caused oil to spike, but these numbers are small relative to the 9.5 mbblpd of US production).

    I know there were some recent accusations against the EIA crude numbers brought forth in the media suggesting production numbers were overestimated. The accusations were based on some faulty math, which now the author claims under report actual production. While I have wondered about the adjustment number positive bias, I still believe the EIA does an excellent job providing the most reliable information for the energy industry. We are lucky to have such a great resource made available to everyone.

    It is also worth noting that every country is now trying to produce the maximum amount of oil possible. The author suggests that the US used an extra 3 mbbl in April or approximately 100 kbpd extra. The US consumes approximately 19 mbblpd of crude and crude products so the increase equates to 0.5 %. Many others have pointed to increased oil consumption by China, but neglect to mention that most went to the strategic petroleum reserve. Unfortunately, it is more difficult to determine consumption by other countries than it is to obtain US data, though OPEC has some decent information on this.

    The assertion on media bias I find very puzzling, though I haven't investigated this. Today, I listened to a young lady on Bloomberg discussing today's EIA report. She seemed shocked and concerned about the drop of 2.2 mbbl of crude and drops in gasoline and distillate stock as well. She was certain that the quick spike in crude price was justified based on this data and to a casual viewer, it seems logical. She neglected to mention how all the current crude and finished stocks were at or near historical highs and did not discuss the production numbers. Right now, this would suggest the media bias is for increasing oil prices.

    There are better articles discussing oil on this site, but the best factual information comes from EIA, IAE and OPEC (there are other government sites that provide local data). If you are serious about investing or speculating in energy, you need reliable information that no one page article can supply.
  • Matt Biddick on May 14 2015 said:
    IF, we can believe data from EIA, IAE, or OPEC, then the numbers I always go back to are these: 9 mmbopd increase in demand in 6 years from 1/09 to 1/15. The only reason that demand was met was because somewhere between 1500 - 1800 rigs were drilling to produce the supply. That rig count in now below 900. Those rigs were at work previously because $90-$100 oil incentivized it. Demand going forward will continue upwards at probably near the same rate, or faster because of lower oil prices. The tightening of supply/demand is in the works.

    As for shaping of perceptions, i.e., the propogandizing of the data, that will go away when real customers need real oil and it isn't exactly easy to get it.
  • Mike Dedmonton on May 14 2015 said:
    I should clarify my comment on media bias. There is a tendency by the media to report a story (oil down, oil up) and seek information that validates the story. So when there was concern about Cushing overflow, there were a number of reports indicating this would/may happen (it still could but is unlikely as there are other sites to store oil).

    The US shale production is a great story. It was widely known that shale has a lot of hydrocarbon trapped in it, but it was too expensive to develop. The price rise of oil gave the incentive to prove it could be done. It also made bitumen development possible. It also gave incentive to do more work with less energy.

    Now, oil (and natural gas) are over supplied. We know that $ 100 per bbl isn't necessary to obtain oil to meet demand (at today's zero interest - but that is another story). We don't really know what the floor price is to curb supply - but $ 60 is not it.
  • Oscar Guevara on May 15 2015 said:
    No matter so much oil we are able to produce, on short time it will finish, new energy sources and technologies must be researched, or our we´ll be over
  • Rick on May 17 2015 said:
    EIA data is good, when it's revised 6-8 months after the fact. Verleger made mistakes with their calculations, true. They aren't the only ones noticing big problems with EIA, IEA, and OPEC data. EIA is ignoring the ACTUAL data from November through February from the state agencies and relying on their model data. It's discussed here at Oil Price, it's discussed at PeakOilBarrel.com, and it's extensively covered at ArtBerman.com. These sites link to the data sources and have extensive graphs.

    Depletion is real and is underestimated at your peril. PeakOilBarrel discusses the issue extensively. Because of low oil prices, more wells are left as DUC. Not enough new wells are coming on to replace depletion.

    Holding the EIA and other such agencies up as the holy grail which should be believed at face value can cost you. These agencies have been off before and are probably way off now. Verleger was wrong with a figure of 1.6 mmbopd. 200Kbopd is probably close.

    As to media bias. IEA released a report a month or so ago emphasizing that regardless of a falling rig count, production increased. This was trumpeted by most major media. No one pointed out that they were talking about Q4 and the rig count didn't begin to fall until December. That little propaganda move drove oil prices down $2.50 per barrel. Further, EIA data show dropping production in ND and TX in January but this was never mentioned. Only the bad news.

    Just compare the EIA numbers you have now to the numbers for the same time period, six months down the road. Of course six months down the road, no one will care.

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