A Real Shocker - U.S. Oil Production Was Down In December Versus November

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Includes: BNO, DBO, DTO, DWT, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU
by: HFIR
Summary

EIA 914 showed December US oil production at 11.851 mb/d or 57k b/d lower than November's 11.908 mb/d.

Most of the decline came from Gulf of Mexico, which puts US oil production close to ~12 mb/d ex-maintenance.

But there are ~30 mbbls of unexplainable crude storage build in Q4 with weekly US oil production + adjustment far outpacing the EIA 914 production figures.

What's clear from the report is that US oil production did not jump to 12.4-12.5 mb/d as the weekly+adjustment seemed to indicate. Production is likely closer to ~12.1 mb/d at the moment.

This is then bullish for oil prices for the rest of the year as we explain below. US oil production is likely to exit 2019 at 12.9 to 13 mb/d.

Welcome to the "surprise?!" edition of Oil Markets Daily!

The highly anticipated EIA 914 report was released today and surprise, U.S. oil production was lower versus November.

November U.S. oil production was revised slightly higher to 11.908 mb/d while December U.S. oil production came in at 11.851 mb/d or lower by 57k b/d. Most of the decline came from Gulf of Mexico as seasonal maintenance pushed overall production lower. Taking the maintenance aside, U.S. oil production is likely closer to ~12 mb/d at the moment or in-line with our U.S. oil production model.

More importantly, however, is that the surprise came as a result of what the EIA was implying via the unaccounted for crude oil, or known as the adjustment factor. The adjustment factor is a plug as many of you may know already. It's this little section right here in the EIA weekly oil storage report:

Source: EIA

Now if you take a look at the chart above, you can see last week's adjustment was only -3k b/d or basically negligible. But over the course of Q4 2018, the adjustment factor went wild.

Source: EIA

Historically, a positive adjustment indicates either supplies are being understated or that demand is being overstated. We learned at the end of 2017 that if we used the weekly U.S. oil production and add it to the adjustment factor, it was a good predictor of the monthly U.S. oil production figures.

So as you can see, the weekly U.S. oil production figures did indeed understate the actual production levels.

But here comes the issue - if you take the weekly U.S. oil production figure and add the adjustment, you don't get the EIA 914 U.S. oil production figures. In fact, you get a figure far less.

Source: EIA

Now if you take the EIA figures to heart, you get U.S. oil production that was 218k b/d, 216k b/d, and 556k b/d lower in October, November, and December, respectively. By isolating this figure, you get unexplained crude storage builds totaling 30.461 mbbls in Q4 2018 alone.

And if you expand this forecast to cover the rest of 2018, you get unexplained crude storage builds of ~55 mbbls.

Source: EIA

For anyone curious about these calculations, you can go to EIA's page and calculate the data yourself.

So, what does all of this mean going forward?

There's a possibility, we think, that EIA will revise U.S. crude storage lower in a one-time adjustment. EIA might exclude linefill storage that has been included as commercial storage, when in fact, it's not really commercially available as it's the oil needed for pipelines to function. Is this what caused the unexplainable build? Possibly.

Another possibility is that with U.S. crude exports skyrocketing in 2018, the export variable has started to play a larger role in explaining why the adjustment factor is always swinging around. But this explanation doesn't really explain why the adjustment was consistently positive as one would think the custom data lag for exports balance itself out over time.

Whatever the case may be, what's clear to us is that U.S. oil production in December did not increase to ~12.4 mb/d to 12.5 mb/d as the adjustment + weekly figure implied during the reports. What's clear is that U.S. oil production is indeed starting to stagnate.

And with the first 2 months of 2019 gone, the stalled growth in U.S. oil production forecast is panning out, and we will explain what that does to global oil market balances for the rest of the year.

What does this mean for the rest of 2019?

Our model assumes U.S. oil production to grow to 12.9 to 13 mb/d by year-end. This uses a well completion estimate slightly lower than 2018. This has also been double verified via individual producer capex guidance for 2019 where producers are spending less capex and completing less wells. Thanks to the momentum from the high exit production rate of 12 mb/d, U.S. oil production should still be fine for 2019, but the growth momentum massively stalls into 2020.

What this means for 2019 then is that our forecast for a U.S. crude storage draw of ~70 mbbls for the entire year remains on track. In fact, this last week's EIA historic crude storage draw of ~8+ mbbls surprised even our forecast of -2 mbbls. The low U.S. crude import trend will continue, which should put further pressure on U.S. crude storage balances going forward. This is especially the case once U.S. refineries exit maintenance season.

More importantly, the alignment of U.S. oil production growth with our assumption leaves us to the conclusion that the oil market is still within Saudi Arabia's grasp. Recent commentary from the Saudi energy minister, Khalid Al-Falih, indicates that OPEC+ will likely extend the production agreement into the end of 2019 in the June OPEC meeting. However, we do think the output cut will be adjusted downward from 1.2 mb/d to ~800k b/d as the Saudis are likely forecasting the same deficit scenario we are seeing in the second half of 2019 (-1+ mb/d deficit). This will give Saudi room to increase production back closer to ~10.4 mb/d, a level just comfortable enough for the Saudis to maintain.

But the bullish surprise for the market will come via the disappointing production figures reported by non-OPEC ex-US. Mexico started off by disappointing the world with a 1.62 mb/d oil production figure for January. Brazil started the year with a -3% m-o-m when it was supposed to grow 300k b/d+ this year. And more countries will likely see supplies surprise to the downside as a lack of capex investments since 2014 starts to haunt the market.

Couple the supply side surprise with demand rebounding in H2 2019 and higher refinery throughput in front of IMO 2020, and we think Brent has upside to $90/bbl this year.

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.