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The Energy Report 11/11/19

Rigs Drop, OPEC Pops and the EIA Gives Backdrop

Oil prices are starting out a bit weak on this Veterans day as OPEC is signaling that there will be an extension of the current production cut but nothing bigger. This comes as the market deals with yet another drop in rig counts and a rebound in OPEC production. Market Watch reported that the Baker Hughes BKR, +0.77% on Friday, reported that the number of active U.S. rigs drilling for oil fell by 7 to 684 this week. That followed declines in each of the last two weeks. The total active U.S. rig count, meanwhile, also fell by 5 to 817, according to Baker Hughes.

Oil Price reported that, “OPEC’s crude oil production jumped by 1.26 million barrels per day from a decade-low in September to 29.71 million bpd in October, as Saudi Arabia restored its production to levels before the attacks on its oil facilities in mid-September, the monthly S&P Global Platts survey showed on Friday. Saudi Arabia’s oil production jumped by 1.35 million bpd to 9.8 million bpd in October, as it appears to have fully recovered output after the September 14 attacks on vital oil infrastructure that took 5.7 million bpd—or 5 percent of global daily supply—offline. This comes right before the Saudi Aramco IPO.

Rather than provide its own assessment, Aramco used a forecast from industry consultant IHS Markit Ltd. that forecasts oil demand to peak around 2035. Under that scenario, demand growth for crude and other oil liquids will be “leveling off” at that time. In an accompanying chart, the Saudi oil giant showed global oil demand lower in 2045 than in 2040. While Aramco didn’t explicitly endorse the forecast, its inclusion in the 658-page IPO prospectus will bring attention of investors worldwide. The company’s directors believe that the data provided by the industry consultant are “reliable,” according to the prospectus.

Energy Report Readers are also asking more questions about the Weekly Energy Information Administration “Petroleum Status Report”. Robert Merriam at the EIA said he wants the facts out, and more importantly to facilitate a better understanding of EIA’s data in the broader community. As such he has answered some Energy Reports readers’ questions. He has also considered adding weekly exports to the weekly EIA summary based on our suggestion.

Tim Dallinger on twitter asks, “As described by Merriam in the article, the EIA uses reported tank volumes to determine inventory numbers. This is captured in the EIA-803 weekly crude oil stock report. However, it does not take into account what is in these tanks. Dallinger says that in some locations, crude is being cut with butane instead of condensate to increase pipeline capacity and save costs. This crude-NGL mixture is counted as crude. This could be the root of the large adjustment factor. Mr. Merriam from the EIA answers, “Yes, we do believe that more NGL is getting added to the crude and yes, this would help explain some of the imbalance in supply/disposition of crude that is derived as the crude adjustment. Not sure of how much of it, but in theory, yes. We’d hoped to update our forms to capture this crude blending to help address the growing adjustment number but unfortunately had to defer those forms change for now.

Another question stated, “the EIA/gov’t can’t identify millions of $$$ of imported oil so they label it unaccounted for? Why?” Mr. Merriam says that, “the gov’t/EIA/OMB is sensitive to balancing the reporting burden on the industry each week with our desire to get good information out to markets. Customs already collect export data and we think it’s a good use of taxpayer money to leverage that data to inform our total crude puzzle rather than have EIA do another collection of those same industry players. We’re often within +-6% in the last year every month on export estimates. Mr. Merriam says that, “We’re not missing $$$ of imports, nor is it the sole factor for the unaccounted for. Again, the entire crude puzzle (runs, imports, exports, production) covers transactions by over 3,000 entities moving over 40 million barrels every single day! If our unaccounted-for averages 500,000 bbl/d, as it unfortunately has lately, that’s just about 1.25% of an imbalance on these massive daily transactions. It’s relatively small in comparison, but admittedly, larger than we like. He also says that, “the NGL blending issue is a thoughtful example of a potential real issue, and there are others too that we hope to address.”

The reader also asks that, “However, that error, the adjustment factor, should still zero out.” Mr. Merriam says that, “Yes, a true “error factor” would tend to zero out over time in the absence of any underlying structural issues. The reader says that, “Yet it does now. Even though the EIA corrects the other assumptions in that weekly model in the monthly report.

Mr. Merriam says that is incorrect. He says, “We don’t correct any “assumptions” via the monthly report. These are two independent survey efforts collected independently. We use the monthly data and weekly data to validate each other, however, as part of our data quality efforts, i.e., we compare what each weekly respondent reports to that same entity’s monthly reporting that is submitted later as one example of using the surveys to validate each other. And we compare the aggregate totals to see how well our estimates for non-sampled weekly entities (about 5-10% of any data element) are doing. But there is no “truing up” any values in the later monthly data. The more detailed monthly report serves as the benchmark for choosing our next weekly sample. I don’t know what assumptions he thinks we make and/or correct for. The monthly report also produces its own crude adjustment as well, since the monthly crude oil puzzle also fails to fit perfectly, despite that every primary supply chain entity is required to report to us, i.e., no sampling error involved. That fact speaks to some more recent structural issues with how we’re able to collect every barrel of crude oil from all sectors to make a perfect balance.”

So there appears to be an abnormal change occurring in one of the weekly assumptions – going one way…every month. As discussed, and as I noted in interview with Catherine Ngai some months ago, we think it’s related, in part, to our current forms’ inability to capture a growing segment of liquids that are coming out of wet gas streams that are getting put into the crude stream beyond the point our surveys can get them reported; crude butane blending is another reasonable theory too that goes to structural imbalance, not a pure error term about imperfect reporting that should zero over time. But those are not assumptions we make.”

Our point is that readers should understand that the adjustment is our cumulative uncertainty inherent in all the 40 million barrel/day puzzle pieces. And since production is a valid number. Glad he thinks that number is solid….there are many readers who think that’s crap too! But we round weekly production estimates that to the nearest 100,000 bbl/d because it is a modeled estimate which often comes in +-2% of the later monthly volume to avoid conveying false precision. We will have more from the EIA later on and thank Mr. Merriam for his time and attention.

Natural gas is backing off a bit. Despite the snow and the cold, the weather reports are looking for a return to normal after this coming severe cold blast. Reports are delayed by a day this week.

Remember today is Veterans Day. We thank all veterans for their service and I offer a prayer for them and their families.

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Call to get hot updates and trade; levels at 888-264-5665 or email me at pflynn@pricegroup.com

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In case you missed it! Phil’s guest appearance on the McKeany-Flavell Hot Commodity Podcast last Friday, September 20th talking about current energy market dynamics. LISTEN HERE!

Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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