The Phil Flynn Energy Report
The EIA X Factor
Oil prices started out strong on U.S.-China trade talks only to fade as reports of whether all in the Trump administration are ready to lift tariffs. With U.S. trade war uncertainty, oil is continuing its volatile uptrend.
Yet what was key was the fact that oil seemed to forget all about the 7.9-million-barrel crude build that was reported by The Energy Information Administration (EIA) and rallied like there was no tomorrow. Despite that big weekly build, the fact is that maybe a 7.9-million-barrel crude build isn’t quite what it used to be. In fact, perhaps many of us, including myself, may have been looking at the data incorrectly, mainly because of the sheer size of the U.S. oil market, as well as trying to read too much into weekly export numbers.
Yesterday I had the pleasure of speaking with Robert Merriam of the EIA. Mr. Merriam says that despite the recent criticism of data, on average the EIA data is mostly correct. Yet, because of the explosive growth of U.S. oil production and the fact that the U.S. is now a major energy exporter, we are going to see a wider weekly swing in inventory that may or may not swing back over time.
Mr. Meriam said that where I am getting it wrong is understanding how the EIA collects its data. Mr. Merriam says that “Unlike most of the data we publish each week that is collected and validated by EIA directly, including refinery runs, imports, and inventory data, for exports EIA relies on raw Customs data reported that is shared with us to estimate weekly exports. But the key point here is that both exports and imports are reported in the reporting week that they clear U.S. Customs.
Clearing U.S. Customs is more of an administrative transaction based on the importer having all the information required and filed with Customs, and one that is consistent and objective for respondents to apply; but it is not based on the physical location of the vessel, nor its loading or unloading status. That’s the key reason that ship tracking services may report comings and goings of vessels that don’t match EIA’s weekly estimates for imports (or exports) in any given week, but over a longer stretch, those timing differences between the observed physical locations and clearing U.S. Customs even out to match pretty well.
“That’s why we encourage using 4-week averages to assess trends in these elements. For example, many importers can, and do, clear U.S. Customs while their ship is still several days out from its U.S. destined port, to avoid demurrage if they had to sit at the port waiting to unload while they got their Customs paperwork filed. If the tracking firms assume it’s an “import” simply based on when it arrives at the port, they will be misstating how EIA defines the week that respondents are directed to report it as an import. Secondly, EIA defines the reporting week to be as of 7:00 a.m. Eastern time each Friday morning. It’s not clear how those ship tracking firms define their reporting weeks, based on what comes in any time on Friday, etc.??
“Third, the ship tracking firms are only tracking what they can observe but cannot assess accurately what’s moving via pipeline and/or rail in real-time. Last, we’re now dealing both with very large volumes of exports (and imports) moving each week, and a couple of large vessels that clear Customs or move in/out around EIA’s Friday 7:00 a.m. reporting deadline can result in apparently large swings in data from week to week or not match the ship trackers, which is why we again advise using 4-week averages to draw better conclusions about the market.
“All that being said, the import/export data does not determine our estimate of inventory, which is the number most analysts fixate on. Inventories are reported to us each week by the largest holders of crude inventory at tank farms, refineries, and crude oil pipelines. Our weekly surveys cover moreover 90% - 95% of the volumes held in crude inventory, and we then use statistical methods to estimate for the rest. So, this is mostly all surveyed data with some small amount of estimation. However, we use all the data elements that form the crude oil puzzle to assess this same data to see how well it fits. In this week’s case, I’d say that our estimate of crude exports falling back by about 1 million bbl/d, along with refinery crude runs falling back by 237,000 bbl/d on their own, would easily explain inventory building by over 8 million bbl, which is about what we reported. (1.2 MMB/d x 7).
“So, while there is some unavoidable but relatively minor imprecision around each of these very large elements that are sampled (inventory, imports, and runs) and modeled (domestic production and exports), the independently derived statistics from the various sectors do hang together quite well this week; i.e., given the large decline in exports and refinery runs this week of 1.2 MMB/d, an 8 MM stock build is quite plausible.”
Mr. Merriam also says that the EIA is eager to clear up misconceptions. He also suggested that analysts, even for the weekly supply numbers on crude, should really not overreact to them on a weekly basis. Because of the sheer size of the market, the swings week to week may be more substantial both up and down but a big swing one week or another is not indicative of a trend. He suggests using a longer analysis horizon to identify real trends.
Mr. Merriam also disagrees with any statement that “The oil market has changed faster than the EIA's ability to keep up with it.” The fact is the EIA has had a more difficult time changing from a world where the U.S. was mainly an oil importer to now a major exporter. Mr. Merriam says that the EIA has adopted an approach for estimating exports that are vastly better than our prior method. There are other form changes we hope to make in the future that will allow us to keep up as well.
Mr. Merriam also said he and the EIA are going to continue to try to not only release the most accurate data possible but also strive to help users of the data better understand it. While we might be in for crazy week to week supply fluctuations because the size of the market, even with the slight adjustment, numbers will seem larger because of the sheer size of the marketplace. Mr. Merriam also has offered to continue to help clear up misconceptions and also to listen to my readers to add suggestions for ways the EIA might be able to keep them aware of changes that they need to be aware of and better ways for the EIA to explain its data. I really appreciate Mr. Merriam’s time and thank him for reaching out to try to help my readers. I’ll have more from him next week!
This week look to trade news and rig counts to determine trade direction. Distillate products surprisingly fell harder and RBOB gas staying stronger.
Ahmad Ghaddar and Stephanie Kelly at Reuters write that “The United States is taking advantage of record-low prices of one of the world's dirtiest fuels by buying record volumes, which it intends to upgrade into cleaner products before new shipping rules take effect, trading and analyst sources say.”
U.S. trade sources said it recently had become economical to ship fuel oil from countries such as Russia, boosting imports of the product into the United States. This comes even as prices for high-Sulphur fuel oil (HSFO) on the U.S. Gulf Coast trend lower while demand for high-Sulphur fuels sags globally. Fuel oil in the region traded at $41.56 per barrel on Nov. 6, a three-year seasonal low, data from S&P Global Platts shows. Fuel oil prices in Europe have also fallen to record lows, which has helped make exports to the United States economical.
The EIA reported that Working gas in storage was 3,729 Bcf as of Friday, November 1, 2019, according to EIA estimates. This represents a net increase of 34 Bcf from the previous week. Stocks were 530 Bcf higher than last year at this time and 29 Bcf above the five-year average of 3,700 Bcf. At 3,729 Bcf, the total working gas is within the five-year historical range.