U.S. Oil Data May Create False Impression

Every week many of us pour over numbers.  We look at the “rotary” rig count data from Baker-Hughes, API Inventory reports, and EIA reports.  That’s in addition to the monthly reports out of OPEC, the EIA, and the IEA.  Traders speculate and pundits fill volumes of internet news websites giving their educated opinions on oil.

And every time a member of OPEC opens their mouth to the media, a constant litany of self-promotion comes out and they brag about OPEC’s high compliance rate, and how OPEC has achieved record compliance.  Yet, storage didn’t seem to be drawing down in a significant way.  Now this certainly made since for the first few months of 2017.  And may make some sense in the early part of the year, but by March we expected to start seeing some draws in U.S. inventory.

And the fact that we didn’t made the traders skeptical, and concerned, and resulted in oil starting to tank again in February.  Commentators jumped up and down offering every explanation for the resurgent shale drilling to OPEC’s alleged lack of compliance.

As the market has seemed to tighten though, several reputable publications took a different view, and one that I find interesting: that the U.S. data skews the results and creates a false impression of overall worldwide oil stocks.

History of U.S. Oil Data

As we have discussed in prior articles (many times, and discuss further this week) the amount of data available on production, consumption, and storage of crude oil, outside of the United States, is remarkably limited.  The U.S. has the Energy Information Administration (a branch of the Department of Energy) which is charged with collecting such data.

As some of you remember, in late 1973 OPEC imposed on oil embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations brought about by the Arab-Israeli war. (For more history, visit the Office of the Historian for the Department of State here: https://history.state.gov/milestones/1969-1976/oil-embargo).  The embargo put a stranglehold on the U.S. economy which had become increasingly dependent on foreign oil.  OPEC further demanded that foreign oil corporations increase pricing and give a greater share of revenue to their local subsidiaries.

The onset of the embargo contributed to a massive upward price shift.  The price of oil per barrel first doubled, and then quadrupled, imposing skyrocketing costs on consumers.

Partly in response to these developments, on November 7 the Nixon administration announced Project Independence to promote domestic energy independence.

But the problem became a political one.  In a survey conducted in February 1974, 53% of those questioned blamed the American government for not anticipating how severe the impact of the embargo would be.  Even as late as 1979, 65% of people surveyed blamed oil and gas companies for deliberately withholding oil and gas production, 61% blamed them for refusing to drill wells unless prices were increased, and only 59% blamed OPEC.  And despite it being illegal, many reputable Newspapers and magazines accused domestic oil and gas producers of colluding with OPEC to cause the price inflation.

And of course, American politicians were eager to show their constituents that they were going to do something about it.  Senior Senators took to the airwaves to demand answers to why oil companies were making record profits, and between 1973 and 1975, at least 25 of the 39 permanent congressional committees then in existence held hearings to discuss the energy crisis.  Congress became a publishing house, issuing report after report.

The Federal Energy Administration Act, enacted in May 1974 when memories of the crisis were still sharp, established the post of federal energy administrator and endowed it with sweeping powers to take such actions as necessary “to assure that adequate provision is made to meet the energy needs of the nation” (Public Law 93-275).

The administrator was empowered to “collect, evaluate, assemble, and analyze energy information on reserves, production, demand and related economic data” (section 5(b)(9)).  The law further required that all persons owning or operating facilities or business premises who are engaged in any phase of energy supply or major energy consumption shall make available to the administrator such information and periodic reports, records, documents and other data ... as the administrator may prescribe by regulation or order”, the law stipulated (section 13(b)).

And if that were not enough, the law gave the administrator power to issue compulsory surveys and questionnaires, conduct physical examinations of plants and subpoena evidence (sections 13(c)-(e)).
And viola, the American energy information age was born.  These broad and sweeping powers granted to the administrator set a huge precedent and enabled massive data collection of what most would otherwise deem confidential, proprietary business information.

But What About Other Countries?

But most other countries lack any transparency in regards to energy.  As we have talked about before, some of this is a lack of desire, China and Saudi Arabia, for example.  Others may lack resources or desire to do so.  India, for example, does not keep a plethora of transparent information, yet, a large part of world demand growth is forecast to come from India.  Many nations would probably like to have that type of information, yet, it is simply not an affordable option for them.  The EIA, for example, costs U.S. Taxpayers in 2016 $122 million dollars.  For many countries, that is an astronomical  number.

Moreover, even in countries that do track such data, the data is often delayed by several months.  In a world where markets move in fractions of a second due to computerized/automated trading, a month might as well be 100 years.

So we are left with other methods of judging world supply, demand, and storage levels.  As we discuss in the next article, tanker movements are monitored, and educated guesses are made.

Where Does This Leave Us?

One of the more interesting comments from 2016 Earnings Calls for the major OEMs, was the CEO of Schlumberger who suggested world decline rates (the natural loss of production) were more than anyone was factoring in the supply side of the equation.  And another implication to his comment, in hindsight, was that world inventories may therefore reach balance quicker than people believe.

When he made the statement, U.S. inventories were still building, and all of the data suggested a resurgent shale might be the cause.   So while I have tremendous respect for Mr. Kilsgaard, I was left scratching my head, but hoping he was right.

Now, both Retuers and the Financial Times seemed to have clued in on this interesting phenomenon.  The principal is effectively that available data skews perception, and then influences markets.  Perhaps it is even worse: available data skews perception, which influences the market, but then the market change is trended and people see the trend and assume the correctness of the available data – in effect the theory proves the truth rather than the truth proves theory.

But the problem is compounded even further.  As the U.S. develops its own cost-efficient supply, the U.S. data becomes less and less important.  Emerging markets such as China and India, where the data is not available, are becoming more important in draining world oil supplies.  Yet, because of the lack of available data, we tend to still focus on the U.S. reports.   And interesting proposition and one to keep in mind as we make business decisions.

By: Ty Chapman
Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY
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