Yet More Bullish Oil News

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Includes: BNO, DBO, DTO, DWT, NRGD, NRGO, NRGU, NRGZ, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU, YGRN
by: Daniel Jones
Summary

A general feeling of malaise is permeating through the oil markets, but this is irrational.

While trade war concerns are real, actual production figures from the US should be the real story.

Production of crude in aggregate for this year is materially lower than weekly forecasts have pegged it at.

The oil market is a tricky one, with several different working parts of significance, and data coming from just a few major organizations bearing any real weight. Given all of this, it can be easy to overlook vital data that can help give some indication as to the future of the space. Perhaps the most overlooked metric that investors should pay closer attention to is provided by the EIA (Energy Information Administration) in the form of its 914 report. This report details for market watchers the official monthly oil production figures across the US on a thousands of barrels per day basis and should act as the final form of what the weekly data provided by the EIA is meant to be. In its latest report, the organization revealed its third monthly production decline and widened the gap further between what weekly estimates have been pegging aggregate production at this year and what the reality of the situation actually is. In all, this data is yet one more bullish sign for investors in the space that suggests there could be a nice bit of upside for crude and companies tied to it in the months to come.

A disparity continues

In its latest monthly report, the EIA revealed that WTI crude production in the month of June, the latest month for which data is available, came out to 12.082 million barrels per day. This is the third monthly decline, with crude output falling 33 thousand barrels per day compared to the 12.115 million barrels per day that was produced in May and coming in 41 thousand barrels per day lower than the 12.123 million barrels per day seen in the month of April. At a time when fears of surging US output have taken over, this may seem odd, but for close watchers of the market it shouldn't serve as much of a surprise. After all, over the past year, the oil rig count has dropped by 120 units, and at some point (whether that's now or in the future), it must take a toll on production.

Whether output will continue to fall or not is impossible to tell, but the near-term trend is encouraging for oil bulls. An actual drop of the magnitude seen in this three-month period is not all that significant but when you look at overall production trends seen over the 2018 through current 2019 period, all shown in the chart below, you will see that current production levels have at least temporarily peaked, which is far better for investors in this space than the several months of production increases that were seen leading up to this period.

*Created by Author

Looking at the picture on an absolute basis is important, but investors should also put these figures up against the closely-watched weekly ones for even clearer context. In the graph below, you can see how the weekly output figures stack up against the monthly ones. At first glance, there may not be much of a difference, but if you look at the graph below that, you can see the disparity that has existed for all of 2019.

*Created by Author

*Created by Author

So far this year, we have seen the official monthly figures come in lower than the average of the weekly ones. The smallest difference came back in January, when weekly estimates were too high by the tune of 18 thousand barrels per day. While that's not material at all, what was material was the fact that in February, this spread was an astronomical 0.349 million barrels per day. In its latest month, this dropped back to Earth, but at 0.118 million barrels per day, it is far from immaterial itself.

Taken another way, this data, if compiled for the full year, suggests that oil production, in aggregate, has been quite a bit lower than one would expect if they were relying solely on the weekly numbers. By my math, the first six months of this year would result in a disparity between weekly and monthly production figures of 27.234 million barrels, with monthly coming in that much lower than weekly estimates implied.

One thing that's important for oil investors to keep in mind is the time lag between when weekly figures come out and how long it takes for monthly figures to be tabulated. As I type this, it is already September and weekly output estimates through almost the very end of August have been provided. With one exception, these figures have almost consistently been at about 12.30 million barrels per day, with the latest weekly estimate placing production as high as 12.50 million barrels per day. What this suggests is that either the monthly figures will revert back to growth and play at least some catch-up or the opposite will end up true and the weekly figures will disappoint even more than they have recently.

Takeaway

Right now, the oil market is facing a rather interesting period. From a production standpoint, despite output having risen significantly over the past 12 months, the picture is actually not as bad as the weekly data shows. The current trend in the weekly data is for US production to continue rising, but if this year has been any indication, it's hard to imagine that monthly data doesn't surprise investors in a rather bullish way.

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.