Bullish Oil Sentiment Intact After Government Report

| About: The United (USO)

Summary

Data released by the EIA shows that the oil situation is little changed from where it was a month ago but this is bullish by definition.

While U.S. production will remain unchanged this year and next from prior estimates, OPEC output will increase slower than anticipated.

On top of this, U.S. and global inventories should fall faster than anticipated this year.

Oil prices closed higher on June 7th, hitting $50.36 per barrel, after the EIA (Energy Information Administration) released its monthly Short-Term Energy Outlook and continued to remain high for the week. In the report, the organization revised its annual energy projections for 2015, 2016, and 2017. Overall, I found the report tepid, unlike the one we saw a month ago, which reported a 50 million barrel decline in OECD inventories for last year, but it is worth nothing the overall outlook they have and what it means for companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for those in the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs.

Supply and Demand didn't change much

On the supply side, the EIA hasn't made any large revisions to its analysis. As you can see in the table below, domestic production for the U.S. should be unchanged from what was forecasted last month. If they are accurate in their estimates, 2015 still saw a 9.43 million barrel per day output, on average, and 2016 will still see production come in at approximately 8.60 million barrels per day, a year-over-year falloff of 830,000 barrels per day. Even in 2017, despite seeing oil prices increase and some rigs come back online, production should still be roughly 8.19 million barrels per day, a number that is unchanged from last month's forecast.

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On the global scale, we see some revisions but they aren't large, as can be seen in the table below. For 2015, the EIA now believes that global supplies averaged 95.74 million barrels per day. This represents a decrease of 30,000 barrels per day from last month's forecast of 95.77 million barrels per day. For 2016, estimates have remained flat at 96.23 million barrels per day, while 2017's supplies should be about 97.02 million barrels per day, 30,000 barrels per day greater than the forecast a month earlier.

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Looking at OPEC, the EIA did provide a slightly positive outlook for oil bulls. If their numbers turn out to be correct, production from the group still averaged 31.55 million barrels per day but 2016's estimate comes out to 32.35 million barrels per day, a drop of 80 thousand barrels per day from the prior forecast of 32.43 million barrels. Meanwhile, next year, OPEC will likely produce approximately 33.04 million barrels per day, a decrease of 50,000 barrels per day from the prior month's estimate.

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In addition to seeing the supply side come in mostly unchanged across the board, the demand side of the equation didn't change much either. If the table below is correct, global demand was the same as last month's estimate for 2015 at 93.81 million barrels per day while 2016's forecast shows demand of 95.26 million barrels per day, an increase of 20,000 barrels per day from May's forecast. 2017, on the other hand, should see demand drop and come in at 96.73 million barrels per day, a decline of 50,000 barrels per day from the prior month's forecast of 96.78 million barrels per day.

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Putting these disparities together, you can see the following table below. Based on the data provided, the global supply/demand imbalance last year was now 1.93 million barrels per day (with supply outstripping demand), slightly lower than previously forecasted. 2016's numbers also are a nice improvement with the imbalance forecasted to average 970,000 barrels per day, a downward revision of 20,000 barrels per day. Unfortunately, however, the balance in 2017 should be larger than anticipated in the past, coming in at 290,000 barrels per day, an increase from last month's forecast of 210 thousand barrels per day.

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What does this mean for inventories?

After incorporating these changes, it can be seen below that domestic inventories in the U.S. still measured at 1.320 billion barrels last year but this number should fall to 1.300 billion barrels, a modest decline of 2 million barrels from the EIA's last estimate. However, 2017 should see inventories end at 1.262 billion barrels per day. Although this is a nice drop from 2016's forecast, it is about 3 million barrels larger than what the EIA thought they would see when they released their report in May.

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On the global scale (looking solely at the OECD), the picture is little changed as well. As opposed to seeing declines for 2015, 2016 and 2017, of 50 million, 116 million, and 147 million barrels, respectively, which is what was seen in May's report, 2015's numbers were left at 2.997 billion barrels while 2016 dropped a modest 7 million barrels from 3.106 billion barrels to 3.099 billion. This, while small, is nice to see but this will be somewhat offset in 2017 when inventories end at 3.111 billion barrels, 5 million barrels greater than the prior forecast calling for storage of 3.106 billion barrels.

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Takeaway

At this moment, the market seems to be very happy with what's going on in the oil space and I understand why. With production falling in the U.S., there seems to be more upside potential than downside potential. This report, while showing that not much will change from what was anticipated previously, does demonstrate that the EIA is pretty firm in its forecasts. Sure, the picture will continue to change based on a number of factors, but the fact that nothing will change too much under current circumstances should be comforting to investors in this space.

Disclosure: I am/we are long AREX, MEMP, LGCY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My LGCY position is in the form of preferred units, not common ones.