US Oil Glut: An EIA Invention?
By Leonard Brecken
Oil Price, Al-Jazeerah, CCUN, June
latest weekly production data from the EIA, on the back of recent
March revisions, the U.S. managed to post a 76,000 barrel per day
increase in the lower 48. Production from Alaska fell by 61,000 barrels
per day, putting overall U.S. output 15,000 barrels per day higher for
the week ending June 12 compared to the previous week.
comes at a time when multimillion barrel draws have become the norm. It
is important to note that lower 48 production is estimated based on an
EIA black box model, while Alaska is virtually real time data. That
suggests that the weekly supply estimates are hugely overestimated.
These weekly supply numbers are then used as a basis to jump to the
conclusion that the markets are suffering from too much supply. As
stated on OilPrice.com
times before, the amount of "over supply" vs. the averages in the
U.S. according to the EIA amounts to tens of millions of barrels of oil.
I continue to maintain that the EIA revision to production came
very suspiciously at exactly the same time inventory draws began, as did
the "Miscellaneous to Balance" figure used in calculating inventory. The
chart above clearly shows when this figure started to grow and by what
amount. It totals more than 30 million barrels since April and has been
rising, which is virtually all of the oversupply above the mean in the
U.S! To reiterate that number is at discretion of the EIA and is not an
actual data point but an "adjustment."
Data Errors Have Real
This figure, as created by the EIA, has (with
media's help) created the impression of a huge oil glut in the U.S.
market. No one, either within the media or the industry, has asked for
clarification of this number and it is instead taken as gospel. This is
now wreaking havoc in energy states such as Texas, as well as
threatening most oil companies as well as tens of thousands employed
within the oil and gas industry. With such importance placed on a number
which has impacted not only billions of dollars in company revenue but
many lives for the worse, how can it be largely unchallenged by all but
a few in the media?
Whether this is tied to sheer incompetence
or some other, more sinister reason, the number should be as accurate as
possible. The consistent errors put the vast majority of small E&P
companies at risk. The EIA, at its sole discretion, has had the power
the dramatically affect the sentiment and prices of an entire industry
and in some cases completely obliterate it. The magnitude of the errors
is mounting by the day as are the consequences.
On a separate note, one has to wonder about the goings on with
natural gas prices given that they are holding at only 10 percent above
their yearly lows. Stocks, as reported this morning, are still healthy
at 1.4 percent above their 5 year average but this number may be a bit
misleading. Demand tied to coal switching is quite frankly soaring and
is at record highs. To reiterate, this comes at a time when natural gas
production is poised to decline. One of the largest natural gas
producers in the U.S., Chesapeake Energy, is expected to start seeing 5
percent declines in 2016 production according to UBS, as Free Cash Flow
(FCF) continues to be hugely negative at nearly $3 billion through 2016
as debt/EBITDAX (Earnings Before Interest, Taxes, Depreciation,
Depletion, Amortization and Exploration Expenses) soars to over 5X. This
comes as hedges roll off in 2016. With FCF being negative throughout the
group, the problem starts to look like a serious issue. There will come
a day of reckoning when capital expenditures dry up as demand continues
and the data distortions on estimates finally become clear to the
markets. It won't be pretty for prices down the road and it will come as
a result of capital budgets getting slashed based on artificially
depressed prices. When this occurs everyone should re-read this article
as I'm sure the cries from soaring prices will become very loud. The E&P
space won't be the cause but the victim in all this. Data distortion by
government agencies has serious consequences on capital investments.
Image source: Cornerstone Analytics
By Leonard Brecken for
Share this article with your facebook friends