Some Strong Revisions Should Be Coming For Oil

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

Summary

In this piece, I decided to dig into recent data provided by the EIA and Baker Hughes.

Overall, the oil picture continues to brighten up for long-term investors and the trend is showing no signs of stopping.

I wholly suspect some revisions will be made by the EIA very soon regarding inventory levels.

This will show either stronger demand, weaker supply, or both, and should be bullish for investors moving forward.

The past week saw a continued move toward firmer oil prices, driven by increased market sentiment that oil rebalancing is finally happening. For the third quarter as a whole, oil prices closed up around 12% compared to the second quarter, driven by a mix of data that has, undoubtedly, pointed toward a bullish outlook. In what follows, I will dig into the data provided and give my thoughts on why the picture should remain bullish for investors in this space.

Mixed but mostly bullish inventories

*Created by Author

During the week, one thing that came out positive was the amount of oil currently in storage. According to the EIA (Energy Information Administration), the amount of crude in storage came in at 471 million barrels. This represents a decrease of 1.8 million barrels compared to the 472.8 million barrels seen a week earlier. While this drop is not that large, it should be mentioned that is was larger than the 0.8 million barrel decline estimated by the API (American Petroleum Institute) and was far better than the 3.1 million barrel rise forecasted by analysts. 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

If the EIA's estimates are correct, crude wasn't the only area to post an improvement. According to their estimates, for instance, residual fuel stocks dropped by 0.8 million barrels down to 36.3 million barrels. Propane/propylene saw an even larger decline, falling by 2.4 million barrels to 78.4 million barrels. Smaller decreases came from distillate fuel and the "Other" category of petroleum products, which both fell 0.9 million barrels to 138 million barrels and 297.5 million barrels, respectively. A modest tick down came from fuel ethanol, which saw inventories decline by 0.4 million barrels down to 20.7 million barrels.

While this is great news, it should be said that there were a couple of areas that got worse. Based on the data provided, motor gasoline inventories ticked up by 1.1 million barrels from 216.2 million barrels to 217.3 million barrels. Kerosene-type jet fuel was the other category to worsen, rising by 0.9 million barrels to 41.3 million. Despite these, however, the sum of crude and petroleum product stocks still managed to fall by 5.1 million barrels for the week, dropping from 1.3056 billion barrels down to 1.3005 billion barrels. This is especially positive when you consider that the Strategic Petroleum Reserve offloaded 0.8 million barrels during the week.

Rising production... but rising demand

*Created by Author

So far, the data presented has been undeniably bullish, but there was some bearish data during the week. If the EIA's estimates are accurate, domestic production managed to rise a little, climbing by 37 thousand barrels per day (or 0.259 million barrels for the week) from 9.510 million barrels per day to 9.547 million barrels per day. Though this rise may look like a negative, especially considering my earlier claim that future production increases are likely to be smaller than past ones, it should be mentioned that 21 thousand barrels per day of this rise (or 56.8% of it) came from Alaska, which sees fluctuations from time to time but which should see stable production for at least the next year. In the graph above, you can see the trend that production 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 production is growing, even after you remove Alaska from the equation, so too is demand. If the EIA's estimates are correct, motor gasoline demand during the past week averaged 9.547 million barrels per day. This is a bit higher than the 9.441 million barrels per day seen a week earlier and is well above last year's figure of 8.880 million barrels per day. On a four-week average basis, demand came out to 9.436 million barrels per day, 0.6% above the 9.383 million barrels per day seen the same period a year earlier. Meanwhile, distillate fuel demand remains robust, with the figure averaging 4.033 million barrels per day, a whopping 13.9% above the 3.542 million barrels per day seen during the same period last year.

The US rig count rose... but does it matter?

For the first time in a few weeks, the rig count rose according to data provided by Baker Hughes, a GE Company (BHGE). Based on their estimates, the oil rig count managed to increase by 6 units to 750, which is still quite a bit above the 425 in operation the same time a year ago. In Canada, however, the oil rig count managed to dip by 9 units to 113, but was still above the 84 units in operation seen during this period of 2016. While the rig count increase in the US may look scary, it should be mentioned that all of the major basins, except for the Williston, which saw a rise of just 1 unit, saw total rig counts decrease or remain flat. This means that less-significant areas like Utah and Louisiana are to blame.

A note on the third quarter

While one week's worth of data, plus a spare day, is still waiting to be reported, I think we have enough data right now to conclude that the EIA will need to revise down inventory numbers in its Short-Term Energy Outlook. You see, previously, the organization stated that we should end the quarter for crude storage at around 477.8 million barrels. As of the report referenced in this article, we are 6.8 million barrels lower than that. I would imagine that, with such strong demand like what we have seen this year, we are likely to see an inventory drop to end out the quarter, but even if I'm wrong the chances of such a large build in crude is small.

While the crude difference may not seem material, the sum of crude and petroleum products most certainly is. In its latest report on the picture, the EIA stated that oil and product stocks should end the third quarter at around 1.327 billion barrels. Today, we are at 1.3005 billion barrels, 26.5 million barrels lower than their forecast. This is due largely thanks to motor gasoline and distillate fuel differences. Unless the EIA revises up their weekly figures, I think it's all but certain that their outlook for the third quarter will have to be pressed lower, which may also affect future forecasts.

Takeaway

Based on the data provided, I must say that I am pretty happy with recent developments in the oil space. Truth be told, I do believe that the data should be better than it is, but even though it appears to not be, the picture is undeniably bullish. Now, this doesn't mean that everything is going to be great. I fully suspect that we'll see continued fluctuations and changes in optimism and pessimism. However, the trend is what's important and that trend suggests that we are looking at better times ahead.

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.

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