A Look At Global Oil Data Shows Bullish Signs

| About: The United (USO)

Summary

Oil prices edged down after the EIA reported that domestic oil production will be higher than previously forecasted this year and that the glut here will grow instead of shrink.

This is certainly bearish but when you look at their expectations for the global oil picture, matters look a lot more appealing due to strong demand and better supply data.

After incorporating all data, it seems as though the global oil picture is improving and that this trend will likely continue moving forward.

Oil prices retreated a little bit on August 9th after the EIA (Energy Information Administration) released its monthly Short-Term Energy Outlook, which showed that oil production in the U.S. should end up higher this year and next year than they had forecasted just one month ago. In this article, I will explore this news and detail how, while this is bearish in and of itself, the overall global picture is expected to improve at an even greater rate, a move that should prove bullish for investors in companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs.

The U.S. looks worse... but still not terrible

According to the EIA, the domestic oil production picture for the U.S. won't be as good as they had been expecting previously. In the image below, you can see that while crude production was expected to average 8.61 million barrels per day this year, that number has increased by 120 thousand barrels per day to 8.73 million barrels per day. While this is bad and has certainly been driven by an increase in the rig count in operation, it still represents a drop of 700 thousand barrels per day compared to the 9.43 million barrels per day averaged in 2015. Next year, crude production is now expected to average 8.31 million barrels per day, 110 thousand barrels per day greater than last month's forecast of 8.20 million barrels per day but still a year-over-year decline of 420 thousand barrels per day.

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As a result of these revisions, the U.S. oil inventory levels for crude plus petroleum products should end up at about 1.329 billion barrels by the end of this year. While this is well below current levels of 1.3897 billion barrels, it's above the 1.32 billion barrels we saw at the end of last year and represents a gain of 23 million barrels versus the number of barrels forecasted for year-end a month earlier. In 2017, stocks are expected to be about 12 million barrels higher than forecasted last month. Most of these increases appear to be driven by higher crude stocks.

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But the overall picture is much, much better

If this were all the data presented by the EIA, I'd say that investors should brace for trouble, but what matters most is the global picture, not just the domestic one. According to the organization, this picture is looking up. For starters, if you look at crude demand, pictured below, global expectations call for an upward revision of 20 thousand barrels per day, with growth coming out to 1.45 million barrels per day after factoring in higher demand estimated for last year. Next year, however, demand will be a tad bit weaker than forecasted, so this evens out.

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From a supply perspective, however, things are looking better for both this year and next year. If the EIA's estimates turn out to be accurate, production should average 96.11 million barrels per day this year, down 40 thousand barrels per day from last month's forecast. Next year, that number will be about 96.59 million barrels, a decrease of 200 thousand barrels per day versus the prior forecast. In the image below, you can see how these numbers stack up against one another.

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Interestingly, it appears that some of this (but certainly not all) will be the result of weaker-than-expected OPEC production, with output expected to grow to 32.47 million barrels per day this year, a decrease of 60 thousand barrels per day compared to what the EIA was thinking in July. In 2017, production should grow to 33.03 million barrels per day, 10 thousand barrels per day lower than last month's estimate, as can be seen in the table below.

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These global supply and demand changes have a meaningful impact on the overall supply/demand balance of production. In the image below, you can see the excess supply this year and next year if current forecasts are right and how it compares to the excess supply numbers estimated a month earlier. Based on these forecasts, excess production this year should average 800 thousand barrels per day, a decrease of 60 thousand barrels per day from July, but next year we should see a deficit of 170 thousand barrels per day. This is a nice turnaround from the 10 thousand barrels per day that the EIA figured just last month.

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Adding all of these changes into the equation, the global glut (at least among OECD nations) should shrink a bit through this year and next year versus prior forecasts. While crude plus petroleum products will rise by 81 million barrels this year, this number is smaller than the 93 million barrels previously forecasted. Next year, however, stocks should fall to 3.025 billion barrels, a nice change of 42 million barrels compared to the prior estimate provided by the organization.

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Takeaway

After looking at all of the data, it seems that the global oil picture continues to improve (if the EIA is correct). While the picture will worsen in the U.S., this is driven by higher production expectations, combined (I believe) with continued high imports as OPEC continues to undercut WTI prices. However, seeing higher inventories of cheap oil here actually works out well for the U.S. because, in the event that the EIA's forecast turns out to be accurate, the falling crude and product stocks across the globe next year will allow us to either sell our crude and products at a profit overseas or will allow us to bask in cheap oil longer than other nations.

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: I own LGCYO, not LGCY

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.