Oil Production Took A Tumble

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Includes: BHGE, BNO, DBO, DNO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: Daniel Jones

Summary

In this article, I decided to look at some recent oil-related data provided by the EIA and Baker Hughes

What I found was that, while some data was negative, we titled toward a more bullish picture during the week

That said, historical data suggests that investors shouldn't expect further large decreases but should expect some revision to the upside

This last week was quite a wild one for the oil space. After a series of news items broke, prices closed higher for the week, driven by overall bullish sentiment that left investors feeling optimistic that the future will be better than the past. In what follows, I will dig into some of this data and give my thoughts on what it all should mean for investors in oil companies and oil-related ETFs alike.

Mixed inventory data

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According to the EIA (Energy Information Administration), the oil inventory picture during the week was quite mixed. Based on their estimates, crude oil stocks for the week came in at 509.2 million barrels. This represents an increase of 0.1 million barrels compared to the 509.1 million barrels seen a week earlier. Sadly, this was worse than the nearly 2.3 million barrel decline analysts forecasted, but it was certainly better than the almost 0.9 million barrel build estimated by the API (American Petroleum Institute). In the graph above, you can see the trend that stocks have taken over the past 52 weeks and, in the graph below, you can see the same graph but zoomed-in on so that you can more easily see weekly fluctuations.

*Created by Author

While crude stocks worsened slightly during the week, the majority of categories managed to improve. Take, for instance, motor gasoline stocks, which fell by 0.9 million barrels to 241 million barrels for the week. Fuel ethanol dropped 0.5 million barrels to 21.8 million, and distillate fuel stocks dipped 0.2 million barrels to 152.3 million. Another mover was the "Other" category of petroleum products, which inched down 0.1 million barrels to 288.9 million barrels, but the largest decrease came from residual fuel, which managed to fall 2.2 million barrels to 38.2 million.

This is great news, but it should be mentioned that other categories worsened during the week. Take, for instance, propane/propylene, which soared by 4 million barrels to 58.5 million barrels. The other increase came from kerosene-type jet fuel, which grew by 0.7 million barrels to 42.4 million. Because of these two categories, the sum of crude and petroleum products grew by 0.8 million barrels from 1.3514 billion barrels to 1.3522 billion barrels. It should be said, though, that if you count in the 1.4 million barrel decrease from the SPR (Strategic Petroleum Reserve), total inventories would have decreased.

Great production data but continued mixed demand

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One interesting piece of data that I and the rest of the market seemed to appreciate was a reduction in output. According to the EIA, domestic oil production for the week came in at 9.250 million barrels per day. If this is correct, it represents a decrease of 100 thousand barrels per day compared to the 9.350 million barrels per day seen a week earlier. This is rather exciting but it should be considered that only 55 thousand barrels per day worth of that demand came from the Lower 48 states. The rest came from Alaska but, with output in Alaska expected to average 0.48 million barrels per day this year, we shouldn't be surprised to see a rebound in this category from the 0.44 million barrels per day seen in this past week's data. In the graph above, you can see the trend that demand has taken over the past 52 weeks and, in the graph below, you can see the same graph but zoomed-in on so that you can more easily see weekly fluctuations.

*Created by Author

While the production figure was certainly exciting to see, demand for the week was rather mixed. According to the EIA, motor gasoline demand was weak, coming in at 9.538 million barrels per day. This is lower than the 9.709 million barrels per day seen the same week last year. The four-week average figure here came out to 9.485 million barrels per day, down 2.4% from the 9.714 million barrels per day seen a year ago. Meanwhile, however, distillate fuel demand was still decent on a four-week average basis. Based on the data provided, this metric averaged 3.934 million barrels per day, 2.9% above the 3.823 million barrels per day seen a year ago.

The rig count dropped at last!

One piece of data that really energized me, a known oil bull, was the oil rig count in the US. According to Baker Hughes (BHI), the rig count for the week came out to 756 units, down 2 units from the 758 seen in operation a week earlier. Sadly, though, this number is still far higher than the 341 units seen last year, but it's noteworthy that this ends a 23-week streak of week-over-week growth. In Canada, however, we did not see the same kind of development. Rather, the oil rig count popped 14 units higher to 112, which is far above last year's figure of 35 units.

A look at weekly production fluctuations

Looking over the data, I asked myself if the significant drop in output seen during the week is typical. To figure out whether this is or is not the case, I decided to look at weekly oil data, measuring week-over-week fluctuations, from the start of 2016 through today. What I found is that we have seen some changes in the past that were of a big magnitude like this, but they are few and far between. Take, for instance, the graph below.

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As you can see, oil production estimates are quite volatile, but the trend, this year at least, is clear as day. Of the 26 weeks seen so far this year, only 6 of them reported a week-over-week output decrease. The remaining 20, which comes out to 76.9% of weeks this year, have shown growing production. What's more, throughout all of the sample size (January of 2016 through today), only a couple were as large as or larger than this past week's drop. The last of these took place in July of 2016.

I did mention above, however, that we need to be mindful of Alaska since the state should be pretty easy to forecast production numbers for and is unlikely to be materially impacted, near-term at least, by oil price fluctuations. In the graph below, I made this adjustment, showing production only among the Lower 48 states (this includes the Gulf of Mexico). What the data suggests is that, once again, this decrease is abnormal but not unprecendented. The last one that took place that was this large was in August of last year.

*Created by Author

Takeaway

Based on the data provided, it's clear to me that, while not everything was perfect for the week, oil data was more bullish than bearish. Sure, demand was mixed yet again, but the rig drop, falling production, and decrease in inventories if you count in the SPR, are all noteworthy. We also know that the production decrease seen during the week is rather rare so investors should not anticipate similar drops in the foreseeable future, but so long as we don't see a complete reversal on that front in the near future, oil bulls should be okay.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.