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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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EIA Changes Tack On Latest Oil Crisis

EIA Changes Tack On Latest Oil Crisis

As previously reported the EIA, the IEA and the media have been understating demand and overstating “estimated” production. Today the EIA capitulated, finally exposing the game that has been occurring for 6 months now. They lowered 2015/2016 crude oil production growth to 550,000 B/D and 80,000 B/D respectively from 700,000 B/D and 140,000 B/D. This is a whopping reduction of 21% and 42% respectively when investors were led to believe that Cushing was filling fast and the glut would continue ad infinitum!

On the flip side the EIA has now “created” the overhang issue tied to Iran in 2016 saying that Brent prices may get reduced $5-$15 in 2016 if sanctions are lifted. To reiterate even if Iraq increases exports by 1M barrels demand will and has increased 1 million B/D. How many negatives to do we have to hear only to get dispelled and lose faith in the institutions that are supposedly providing unbiased research? Related: Is Warren Buffett Wrong About Oil Stocks?

Nonetheless investors can see the forward curve flatten on this perceived overhang which in time will be prove wrong just like every other negative. The media today sited the geopolitical Yemen back drop vs. the EIA revision as the reason for the price rise which is completely absurd and just acts to further confuse the issue. The fact is the “glut” hype is just that and has been widely exaggerated in the media for months now. The genesis of it was the over statement of supply and underestimate of demand which is not getting exposed. Yet the media not surprisingly missed the mark completely and most likely on purpose. Related: US Oil Demand Is Alive And Well

In the end the consensus view that the global market is over-supplied by 2 Mb/d will also get dispelled as we move through 2015. Expect global numbers to get revised so that both the US and global figures come into balance later in 2015 and supply/demand equilibrium returns. Expect oil prices to near $60-$70 as we move into 2016 as the “normalized” price gets realized thus enabling renewed levels of exploration for new oil to meet growing demand. Further the 2-5 MB storage builds should shrink in the coming weeks to dispel the concern that Cushing will overflow by May as demand rises and refineries add back capacity post maintenance season. Related: Is This The First Resource Opportunity From The Iran Deal?

Unsurprisingly, the EIA revised natural gas demand up too! The revision upped natural gas demand by 2.8bcf/d in 2015 (a new record) vs. 2.3cf/d to 76.3 bcf/d while only increasing supply by 0.1bcf/d, once again reducing the perceived oversupply. Do we get the pattern here? And just like the game of reducing forward expectations to depress forward prices into 2016 (like in oil by creating the Iran over hang) they project a decline in 2016 consumption to 75.8 bcf/d. How this occurs in light of the coal to natural gas switching is beyond comprehension which is tied into more stringent EPA guidelines on emissions. Perhaps they think global warming will finally occur amid the back drop of two record-breaking cold winters in a row? To remind all, the NOAA, a government run entity, initially forecasted a blow torch winter this year which ended up being true, but only in the west while New England had its coldest winter since 1934. And the propaganda train goes on……

One last comment on natural gas comes from Oppenheimer in their Natural Gas Guide, which has one of the only measurements that accounts for both record natural gas demand and supply. Markets seem to be solely focused on inventory compared to last year and are only recording supply. If we look at Storage Coverage Demand, as OPCO calls it, which compares rising inventory versus rising demand you will see that the number has been declining since 2010! In late 2009 the peak was near 60 days and in late 2014 it was under 50 days. You probably won’t see that statistic reported by the main stream media though.

Just focusing on absolute inventories defines selective perception, as it does not take into account the demand side at all. But that’s exactly what is occurring as natural gas production rates begin to slow with many all-in basin costs above spot prices now rendering new drilling projects moot. Further, natural gas is a byproduct of many oil wells which are also waning or topping. Most natural gas production growth is coming from Marcellus, one of the only basins where new drilling is CF positive.

By Leonard Brecken for Oilprice.com

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  • Sev on April 07 2015 said:
    "Perhaps they think global warming will finally occur amid the back drop of two record-breaking cold winters in a row? To remind all, the NOAA, a government run entity, initially forecasted a blow torch winter this year which ended up being true, but only in the west while New England had its coldest winter since 1934. And the propaganda train goes on……"

    Umm, you must be looking at a different NOAA than http://www.ncdc.noaa.gov/sotc/global. Dec-Feb 2015 was the warmest on record (over the past 136 years) and Dec-Feb 2014 was the 8th warmest. Hard to take your analysis of supply/demand seriously when you're cherry picking data to fit your agenda.
  • Len B on April 07 2015 said:
    Who said anything about global temps? What is said are the facts 100%. Did you also know NOAAs rising temp theory is directly correlated to a drop in reporting stations in recently years (see Joe Bastardi on twitter for details) and the concentration of reporting stations in warmer regions? Further in the US they compare temps today nationwide when urban areas have been added and are generally warmer vs in prior years they did not exist as are many of the reporting stations in the west in the mountains (this area is where it was mild this past winter). So I suggest start investigating NOAA vs question my data on how facts are skewed. I dont have an agenda as I pursue the truth no matter what it is.
  • Arthur Simondet on April 07 2015 said:
    Why does there appear to be a problem with remaining neutral to present data... As pointed out by the comment above, it's unbelievable how bias creeps into what is supposed to be neutral reporting. An effort to present information without force-fed nonsense would be fantastic.
  • Ryan Joseph on April 07 2015 said:
    Many weather reporting stations are located at airports, and many were outside urban areas years ago but are now surrounded by urban sprawl. Urban areas absorb as well as put off more heat than rural areas. This has got to somewhat explain the rise in the station temperature readings. Also, the earth's temperature has always fluctuated from warm periods to cold ones. Ther are so many factors to blame it just on one...
  • Nikhil on April 08 2015 said:
    Arthur I don't understand why you wouldn't appreciate an article like this. Even though i share an opposing view as Len, he presents analysis which makes me scrutinize my position in /NG. I'm targeting $2.25 as we ended winter and always see a big drop in consumption in April. Did you see Oil inventories today? The level of productin is nothing to poo poo at. Sustainable? Who knows. But yes this article definitely correct in stressing the importance of how we've overlooked demand. This year and last year's winter demand in /NG have been massive. To conclude there's nothing more I'd love to do than to go short into a long position.. If only it was that easy...
  • Johnny T on April 19 2015 said:
    My father homesteaded our land in the shale play in 1914, 100 years ago so needless to say I've been following this my whole life... It's not that complicated...it's probably the most brilliant oil play in history by the Saudi's. They've tanked the price by continuing to to produce growing their reserves to the largest in the world. Watch...soon to the world's surprise they will abruptly cease production after covertly behind the scenes influencing OPEC o follow suit and cease as well...oil will spike as T Boone and the czar of OPEC have predicted and oil prices will spike to $150 to $200+ yielding the Saudi oil families a fortune as never seen when they offload their massive reserves. Simple as that

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