The big draw in crude oil inventories reported by the EIA for the last two weeks is hardly a "bullish" data point.
Changes in imports and exports need to be accounted for carefully.
The conclusion may surprise.
We have received multiple questions regarding yesterday's Petroleum Status Report from the EIA, many of which varied on the theme:
Why did oil sell off in response to a bullish report?
Indeed, the prompt month WTI price on NYMEX dropped by nearly 1% following the release (before recovering the loss in today's session).
Let's Agree On What "Bullish" Means
We are the first to recognize that trying to explain intraday oil price fluctuations is a futile and thankless exercise. That said, we did not see anything particularly "bullish" in yesterday's EIA report. In fact, in our interpretation, the report gave more reasons for concern than for optimism as it relates to oil prices. Fortunately, the market appears to be able to see the glass as half-full.
Before discussing the report's implications, it might be helpful to agree on what exactly the term "bullish" means. Most readers would probably concur that the phrase "a bullish report" implies one's conviction that the release will cause the price of the commodity to move higher from the pre-release level.
In this context, "bullish" is not an attribute of the EIA report solely. It is also an attribute of the market's expectation for - and interpretation of - the reported data.
If instead of increasing the price goes down on the news, one's perception of the report as "bullish" is probably inadequate. (In such situations, I try to reflect on whether a confirmation bias has played a role in my misreading of the market's sentiment.)
Second, the term "bullish" is a quantifiable category:
- What is "the price of the surprise?"
- Can one distinguish the report's price impact from the ordinary intraday price noise? Did the price really go down (or up), statistically speaking, or is the move a statistical non-event?
- Furthermore, how important is the news? Is one specific EIA report enough to be convinced that a bet on price would generate a gain? (Many more reports are coming, and not just from the EIA.)
In other words, the term "bullish" only makes sense if the expected price move is statistically material.
When A Draw Is Not A Draw
Coming back to yesterday's Petroleum Status Report, the EIA indeed surveyed a significant week-on-week reduction in U.S. inventories:
- Commercial crude oil inventories: -6.0 million barrels
- SPR crude oil inventories: -1.0 million barrels
- Total motor gasoline inventories: +1.6 million barrels
- Total distillate fuel inventories: -2.6 million barrels.
Adding across, the report shows an impressive 8 million barrel draw across these categories.
But was it a reason to view the report as "bullish" and bet on oil prices moving higher? In our interpretation, not really.
The big draw in crude oil was obviously driven by high exports and low imports during the report week. To quantify, let's compare EIA's weekly data for crude oil during the summer months and during the latest two weeks reported by the EIA. To be specific, I will use the eight weeks from June 3 through July 28 as a reference period. (I have chosen those weeks as they correspond to the latest two months for which monthly data are also available).
The comparison shows that during the last two weeks reported by the EIA, U.S. net imports of crude oil were 1.7 million b/d less than during the reference period. On the other hand, refinery runs were 1.1 million b/d less. Supply from storage was essentially the same.
The only other changes in sources and uses that balance the crude oil flow equation are the changes in domestic oil production and "unaccounted for oil" (the latter is the line item that the EIA uses to capture reporting and estimation errors and imbalances).
If I were to assume that there were no estimation or reporting errors during the last two weeks - which is different from the EIA report - the implied increase in U.S. crude oil production from the average during June-July would be a whopping 0.6 MMb/d.
To be clear, I am not trying to estimate current U.S. production based on the simplified "implied volume" calculation (the EIA has the balancing line item for a reason). I am rather using it to illustrate that it would be incorrect to rule out a large step up in U.S. production volumes going into year-end. The EIA's yesterday's report certainly leaves enough room for such a scenario. While extrapolating the stagnant onshore volumes reported for June and July may be psychologically tempting, being complacent in this regard is risky.
Given the report's implication that U.S. production volumes are possibly already quite high, it was difficult to expect that the market could receive yesterday's data set as a "bullish surprise" for oil prices.
Another data point worth mentioning: inventories at Cushing have continued to rise at a brisk pace.
Taking in consideration that NYMEX WTI is priced at Cushing, it is difficult to think of this trend as "bullish" for U.S. oil, even if the spike in stocks proves short-lived.
How Accurate Are EIA's Weekly Data?
In my personal view, the data are accurate enough not to dismiss some of the red flags contained in the most recent weekly reports.
To illustrate, if I were to take the EIA's historical weekly data for U.S. crude oil production, imports, exports and refiner inputs at their face value, the implied change in U.S. crude oil inventories year-to-date - excluding the balancing line item - would be a decline of 30.7 million barrels.
By comparison, the EIA's monthly survey reports a decline of 35.5 million barrels. The mismatch between the two values is just 17,000 barrels per day on average, a negligible amount when compared to the total petroleum volume being reported. This accuracy is particularly impressive if one consideres the complexity of the EIA's reporting process and architecture.
As another illustration, let's look at the weekly estimates for the U.S. production of crude oil and field condensate. For example, the average production in June-July 2017 was ~9.36 million barrels per day, if one were to use weekly data. By comparison, the average based on EIA's monthly survey is 9.17 million barrels per day, a ~200,000 barrels per day mismatch.
While the mismatch in this specific line item is significant, it is important to remember that the EIA's weekly production data relies on a model which often makes no adjustments for specific industry events, such as facility turnarounds or operating interruptions. As such, the accuracy of the estimate is still reasonable.
It is impossible to cover all the aspects of an EIA weekly data release in a short note (we post more detailed and actionable discussions for our subscribers). It is also impossible to discuss trends in the U.S. market without touching upon the broader global fundamentals.
However, two conclusions appears obvious:
If the levels of U.S. crude oil exports and imports during the latest report week were the same as in June-July of this year, the EIA would have reported a ~6 million barrel build in U.S. commercial crude oil inventories. The news headline would have looked very different, even though the underlying fundamentals could have been the same.
Attempting to interpret a large, vibrant data set by simply glancing at headline numbers is often a wrong way to go and can lead to disappointments.
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