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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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How EIA Guestimates Keep Oil Prices Subdued

Rigs

The EIA has once again undercut its previous estimates for U.S. oil production, offering further evidence that the U.S. shale industry is not producing as much as everyone thinks.

The monthly EIA oil production figures tend to be more accurate than the weekly estimates, although they are published on several months after the fact. The EIA just released the latest monthly oil production figures for June, for example. Meanwhile, the agency releases production figures on a weekly basis that are only a week old – the latest figures run up right through August.

The weekly figures are more like guestimates though, less solid, but the best we can do in nearly real-time. It is not surprising that they are subsequently revised as time passes and the agency gets more accurate data.

But the problem is that for several months now, the monthly and the weekly data have diverged by non-trivial amounts. The weekly figures have been much higher than what the monthly data reveal only later. And remember, it is the monthly data that tends to be more accurate.

Let’s take a look. A month ago, I wrote about how the EIA’s monthly data for May put U.S. oil production at 9.169 million barrels per day (mb/d). But back in May, the EIA’s weekly figures told a different story. The agency thought at the time that the U.S. was producing nearly 200,000 bpd more than turned out to be the case. Here were the weekly estimates at the time:

• May 5: 9.314 mb/d

• May 12: 9.305 mb/d

• May 19: 9.320 mb/d

• May 26: 9.342 mb/d

But two months later, the EIA published its final estimate for May, and put the figure at 9.169 mb/d. So, as it turns out, the U.S. was producing much less in May than we thought at the time. Related: U.S. Taps Strategic Petroleum Reserve After Hurricane Harvey

Now, the EIA has once again skewered its own weekly estimates. On August 31, it released monthly figures for June, and the discrepancy is even larger than the month before. The EIA says oil production in the U.S. actually declined in June, falling by 73,000 bpd to just 9.097 mb/d. Compare that to what the agency thought at the time with its weekly estimates:

• June 2: 9.318 mb/d

• June 9: 9.330 mb/d

• June 16: 9.350 mb/d

• June 23: 9.250 mb/d

• June 30: 9.338 mb/d

If those figures were correct, the U.S. would have averaged something like 9.317 mb/d for June. But the EIA now says that data was wrong, and in reality the figure should have been 9.097. In other words, in June, the U.S. produced 220,000 bpd less than we thought at the time.

(Click to enlarge)

This may seem like nitpicking, but it’s not exactly a tiny number. If that gap were to persist for the full-year, it’s nearly equivalent to half of what Saudi Arabia promised to cut as part of the OPEC deal, or substantially more than what the IEA expects Canada to add in new supplies this year. Related: How Long Can U.S. Refineries Remain Offline?

More importantly, if the U.S. is actually producing much less than the market thinks, there is a much stronger bullish case for oil than conventional wisdom dictates. After all, there are massive shale production gains from the U.S. baked into oil price forecasts. For example, the EIA sees U.S. oil production surging from 9.3 mb/d this year to 9.9 mb/d in 2018, a gain of 600,000 bpd.

But the problem is that not only will it be difficult to reach that 9.9 mb/d, but it now looks like an uphill battle for the U.S. to reach that 9.3 mb/d figure in 2017. For the first six months of this year, the U.S. only averaged 9.071 mb/d. It will have to seriously ramp up production in order to reach that 9.3 mb/d estimate for the full-year. In reality, that looks very unlikely.

That means that ramping up to 9.9 mb/d next year would also appear out of reach, particularly since the shale industry seemed to stall out this summer. Production actually fell from May to June; the rig count has plateaued; some shale companies are already reporting some problems; the lingering effects of Hurricane Harvey will likely impact shale growth rates for months to come (although refinery outages are bearish in the near-term); and sub-$50 WTI prices will keep shale companies from recklessly spending more than they already are.

In short, the U.S. shale industry is on track to disappoint, which would mean there is a lot of upside risk to oil prices.

By Nick Cunningham of Oilprice.com

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  • Kr55 on September 03 2017 said:
    Most likely the EIA is being tricked by privately stored oil that is getting dropped into the tracked inventories as the contango disappeared. Those extra barrels can stop coming any time, and I would expect that would just be handled by the EIA by carrying a negative adjustment without changing the production number much until things levelled out. Wouldn't expect them to make themselves look foolish with a drop of the production number, they can just use that fudge factor adjustment to cover their tracks.
  • Josh Gregner on September 04 2017 said:
    Some things don't match in my mind here: if there are so many bullish signs for oil, why doesn't the price move? We hear of "record draws", we hear of "shortfalls in production" we hear of all kinds of reasons prices should be fundamentally different from where they are today.

    Now, I'm not one to believe in conspiracy theories: I believe the market has sorted this all out. The OPEC game is smoke and mirrors and US shale doesn't matter much for global markets. China has a firm grip on the oil price. So I'm thinking the only player in this game that can really move the needle is China. And what we hear from there is not really encouraging.
  • sean on September 04 2017 said:
    So why is oil less than $50. Strong draws from US storage too, it's not sub $50 for no reason....
  • Guy minton on September 04 2017 said:
    It's actually quite a bit worse than that. Remember the daily production has been revised upwards to 200,000 more a day, even though Texas completions were down in July.
    And the current posting of June historical data on EIA is still an estimate. The initial production stats for Oct 2016, and June 2017 are comparable. What they show for Texas production for June 2017, is 200,000 barrels a day over what they admit Oct 2016 actually was,
    So, I see about a 600,000 over estimation on their weekly figures.
  • Disgruntled on September 05 2017 said:
    Thanks, Nick, for shining some more light on this subject. I am in the business as a small oil and gas producer so I'm biased in that my business is in desperate need of some relief on prices. However, it just seems to me that if one evaluates the way data is presented and how that data is couched in the writing, it is clear that the writing is more in line with propaganda than technical journalism. Two factors in pricing futures of anything are fundamentals and sentiment. Sentiment has been waaaay overstated to the bearish side. Several of the writers on oilprice are guilty of this. I could provide numerous examples. One wonders why.

    Oilprice has featured a writer who has done some pieces on AI computer trading. Apparently, these machines "read" the news and so the use of certain terms in the reporting on the various statistics that go into evaluating a fair price for oil would affect those evaluations. I think the trading of the commodities that affect our everyday life should be limited to the physical volume of that commodity available for that day/month. That would establish a fair price.
  • Jeffrey J. Brown on September 06 2017 said:
    Re: Disgruntled

    Some oil price info:

    In late May, Neil Dwane, with Allianz Global Investors, issued a report in which he outlined "Five reasons to expect higher oil prices." The five reasons are as follows:

    Five Reasons to Expect Higher Oil Prices:

    1) Global oil demand is reassuringly stable

    2) Multiple factors will constrain the oil supply

    3) New discoveries are dwindling

    4) The US shale industry has problems

    5) Domestic production is falling in a booming Asia


    Note that Mr. Dwane references Mexico as a point of concern, but as I referenced below, Mr. Dwane did not get into Mexico's problem with net oil exports, and there is a good chance that Mexico's net oil exports will drop by about half from 2016 to 2017.

    In any case, Mr. Dwane was interviewed on CNBC in July, and he made the following points:

    There's still a major reason why oil could jump back to $120, experts say

    http://www.cnbc.com/2017/07/07/theres-still-a-major-reason-why-oil-could-jump-back-to-110-experts-say.html

    Excerpt:

    Oil supply could easily be threatened by geopolitical risks, and such a disruption could cause oil prices to skyrocket, experts tell CNBC.

    Neil Dwane, global strategist and chief investment officer of European equity at Allianz Global Investors, warned that oil production supply is looking threatened around the world.

    "Venezuela's 2 million barrels of oil a day could literally go any day. Mexico looks poor. Azerbaijan's in trouble. China's own production is collapsing rapidly," he told CNBC's Squawk Box on Friday.

    "One only has to have one mistake and the only thing you'll be talking about all morning is oil at $120."

    Dwane said geopolitical risks could cause prices to skyrocket as several oil producing states are fragile, and oil prices are currently too low for anyone to want to drill fresh wells which may be needed in the future.

    My Comment:

    Mr. Dwanme mentions Mexico, and in fact Mexico is a classic example of what I call "Net Export Math."

    Mexico's production of total petroleum liquids fell from 3.8 million bpd in 2004 to 2.5 million bpd in 2016. Their total liquids consumption fell slightly, from 2.0 million bpd in 2004 to 1.9 million bpd in 2015. The 11 year rate of decline in production was 3.2%/year, but net exports fell at 9%/year. Note that Pemex is reporting first quarter 2017 total petroleum liquids production of only 2.3 million bpd. Assuming that their production averages 2.2 million bpd in 2017, their net exports in 2017 would be down to only 0.3 million bpd (assuming no change in consumption), which would be a rate of decline in net exports of 14%/year since 2004, AKA an accelerating rate of decline in net exports.

    The foregoing is consistent with what a simple mathematical model predicts, and it is consistent with previous real world case histories, to-wit, given an ongoing, and inevitable decline in production in a net oil exporting country, unless they cut their domestic consumption at the same rate as, or at a faster rate than, the rate of decline in production, it's a mathematical certainty that the rate of decline in net exports will exceed the rate of decline in production and that the rate of decline in net exports will accelerate with time, e.g., Mexico.
  • Jon Khandy on September 07 2017 said:
    The EIA said they released 4.5 million barrels of oil to a few refineries last week. In today's inventory report the EIA shows the SPR decreased by only .3 million barrels. Now that is worthy of writing an article about.

    I wonder if OPEC realizes how they are being swindled?
  • RS on September 07 2017 said:
    Drilling cost is 1/3 completion cost is 2/3 for a well to start flowing. + infrastructure costs. DUC means well in 25-30% done. Completion costs are going up fast. Completion costs will go up faster to raise production. The projected growth rates will not materialize at $48-49 oil. Crude needs to be in the 50's. E&P companies were drilling with assumption of oil being at $55-60.

    Everyone is producing all they can. Except Saudis and Kuwait. Only US shale can fill the need going forward, but not at $50.

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