Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Do you remember the bear market in oil? It seems like it was only yesterday. Good times. The bear market in oil may turn out to be only a fleeting moment in history. Oil is now trading out of bear market territory and if we close back in bullish territory, we should be on a path for oil to retest the May highs. The sudden change in the oil market’s mood came after a report of a potential pledge by Mexico to send troops to secure their border, possibly avoiding the newly threatened tariffs that are supposed to go into effect on Monday. Some oil companies and refiners have warned that new Mexican imports could raise product prices on gasoline, diesel and other products and strain refineries. It’s funny they say that because the oil market seemed more concerned about the larger fallout from the potential hit on demand as opposed to the refiner’s concern about higher prices due to the lack of supply. Yet the reports that the U.S. and Mexico might strike a deal had oil try to catch up with the other risk on assets that have soared as the Fed made it clear that they are very close to cutting interest rates.
This comes as recent data from the Energy Information Administration (EIA) comes under fire for the very large adjustments in crude oil inventory that have many people questioning whether recent EIA data is flawed. Market watchers, like private analyst Patrick Bourque, have been raising the question as to why the EIA has continued to over report supply. He pointed out that the EIA has made an upward adjustment of over 24 million barrels in the last few weeks. He wonders if the EIA is trying to use their adjustments to calm a market that is being threatened by OPEC production cuts as well as threats by Iran. The big question that Patrick and other traders have had been where in the world are these barrels coming from?
Bloomberg News is also asking. They say that “Popular guesses for the discrepancy include missing production from the prolific Permian Basin or miscounting of imports or exports. The source could be important, because higher-than-expected production would continue weighing on U.S. oil prices just as investors expect the start of summer driving demand season to spark a rebound. While crude production may be higher, it’s unlikely the full picture, said Robert Merriam, director of the office of petroleum and biofuels statistics at the EIA. He cautioned that while the adjustment factor is high, it only accounts for about 4% of U.S. crude demand.”
He says only 4% of crude demand! Only 4% of crude demand as we have seen can have a huge impact on market moves. 4% of crude demand can be the difference between a bull market or a bear market, or an oversupply or shortage. 4% is critical and until we get an answer on the missing barrels, we could see oil markets fluctuate wildly.
Bloomberg goes on to say “Besides understating oil production, one of the culprits may be plant condensate associated with natural gas output, Merriam said. That plant condensate — a natural gas liquid recovered and separated in processing plants — can get blended into the crude oil stream. While that supply is added into inventories, it’s not getting counted as crude production because it comes from the natural gas stream. As a result, crude stockpiles could rise without a commensurate increase in output.” Ok. I get it. I can’t be too hard on the EIA because we know in the new world of shale oil, things are not as easy as they used to be. But it should also be pointed out that this gas related condensate is not what refiners are looking for when it comes to making product.
Bloomberg writes that the “EIA is hoping to modify its survey questions so it can properly capture this liquid, though that may take some time.” “We go through each component of what’s reported to us,” Merriam said. “There’s something more systematic going on that our surveys aren’t capturing. We have some theories on what that may be and we’re trying to look into it.”
Until we find out, oil may take its cue from outside markets. If you believe that the EIA is underreporting U.S. crude production, then you might want to pay closer attention to the U.S. rig count today. The rig count is falling, and while some think that rig counts might not tell us the whole story about future output, it is telling you that shale producers are starting to pull back. Others argue that the EIA are over reporting shale and we will see a big downward revision in Crude stocks. The EIA may give us the extra barrels this week and take them all away in the coming weeks. As for now, because we are talking just statistics, there is no proof that the extra barrels are actually there. We also must adjust for flooding, pipeline outages and refinery outages that also created a sense that oil supply may be not reflecting the true trend of supply and demand.
We warned you about a potential bearish EIA natural gas report. Thursday’s EIA storage report came in at 119 Bcf, 10 Bcf higher than what most analysts had expected. U.S. production is overwhelming, and rains have kept power generation low and many factories took a break for Memorial Day. Nat gas may get a bit of a dead cat bounce going into the weekend, but it still looks very sick.
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