53 Billion Barrels with No Place to Go

11/12/2019 12:45 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Iran’s crude find may weaken Aramco IPO but is no relevant to supply writes Phil Flynn, who share’s Robert Merriam explanation of EIA reporting.

Iran raised a few eyeballs after Iranian President Hassan Rouhani said that Iran has a new oil field that would increase Iran's proven reserves by an impressive 53 billion barrels of oil. Overnight, this would increase its proven reserves by about one third. The only problem is, with sanctions in place and the lack of capital investment, that oil might not see the light of day for decades to come. There is also some speculation that the timing of the announcement might be a way to tweak its rival Saudi Arabia just before they are trying to price its Saudi Aramco IPO.

Regardless, Dow Jones reported that an Energy Department official has confirmed that sanctions on Iran have removed about 2.0 million barrels from the global marketplace. This comes a day after it was reported by Reuters that Iran is enriching uranium at its underground Fordow site. The reports say that Iran is rapidly accelerating enrichment more broadly according to a report by the U.N.'s International Atomic Energy Agency. Iran is making further breaches of its 2015 nuclear deal with major powers and reduces the odds that a deal with Iran to lift sanctions can be had and this is bullish for oil.

This comes as that same official suggested that the U.S. will hit a production level of 3.0 million barrels a day. Still that same official seems to suggest that despite the increase in supply, he sees U.S. shale producers pulling back. He says that it is a healthy sign that shale producers are going after value and not volume.

International Maritime Organization (IMO) rules are causing wide swings in the market. Bloomberg reports that late last week, high-sulfur fuel oil for December was trading at a discount of almost $30 per barrel to Brent, according to data from ICE Futures Europe. In June, the same contract was at a $13 discount. The ship-fuel rules, known as IMO 2020 by traders, are expected to favor low-sulfur crudes, and both Urals and Arab Light have a relatively high content of the pollutant.

Oil prices are moving positively on trade developments. According to reports it appears that the Trump Administration is going to delay EU auto tariffs as negotiations seem to be bearing fruit. Also, there is speculation that Trump will say some positive things about U.S./China trade talk progress. Still, behind the U.S. China trade talks is the fact that protests in China are becoming more violent. Some fear this could complicate trade progress.

We are still getting a lot of feedback about the Energy Information Administration article. I want to give Robert Merriam time to explain what he thinks is important from our back and forth from my readers. He says to the main points to help readers understand that EIA counts/reports barrels as imports (and CBP reports exports) as when they clear U.S. Customs. Here is his response:

This process is done digitally/electronically, often in advance by a few days, of the vessel arrival to the U.S. port of destination, so it’s not tied to the ship’s physical location. Moreover, abbreviated tweets on the pro of the vessel arrival to U.S. port of destination, so it’s not tied to the ship’s physical location. Abbreviated tweets on the process made it seem that we’re simply waiting for some shipping clerk to file paperwork and mail it in. That does sound pretty lax but that’s not the case. These transactions are filed digitally by the importer/exporter and are uploaded into the CBP transactions database that is made available to EIA in near real-time. In addition, for imports, we conduct our own survey that captures their reports directly and compare that to what is filed with Customs to validate our imports surveys. We’re simply measuring these import/export transactions at a different point in time from the ship trackers and it’s not based on when they land. 

I think the crux of (some) reader skepticism is that they doubted the estimated weekly export drop and thus assumed that we backed into or errantly derived the stock build as a result, giving the market an errant signal. That’s a major misconception and likely the reason that those traders who better understand the new relationship and reasons underlying massive daily moves in/out of crude from inventory are not shocked by the large stock swings in some weeks, once they fully assess the factors that likely caused it, resulting in the muted price moves we often see despite some analysts’ fixation on one number in isolation without context….stocks.

Our stock data is collected directly by us, from the largest holders of crude who are distinct from the import/export entities. Also, note that when the import is reported to us as clearing Customs in a reporting week, the terminal/refinery that will be receiving that shipment as inventory is directed to also include that shipment as part of their inventory, i.e., in-transit inventory, so that we have accounted for both ends of the transaction…both the import and in-transit inventory are collected in the same week. This too can contribute to large weekly inventory swings, as VLCCs and other large tankers become players. 

It’s independently collected data from different sources (refiners, importers, terminals, pipelines, blenders) that we assess against each other as part of our rigorous validation efforts each week. This past week, the large decline in “cleared Customs” exports was directionally fully supportive of the large build in inventory build that was reported to us.

We regularly assess our weekly estimates by comparing each element to the later-provided monthly data. In the case of crude exports, we review the Census monthly data and compare it to initial weekly figures. For exports, we’re seeing that our weekly estimates in the last 12 months are often within +-5% or so. This is a vast improvement over our prior export estimation methodology. I’ve pasted down below a quick comparison of weekly vs. monthly crude export comparisons for the last 12 months. I’ve used the 4-week avg. for the month nearest to the month’s end compared to Census’ monthly published valued for the same month. The green indicates our weekly estimate was higher than Census monthly, the yellow is lower. I think the results are pretty good and show no pattern or over/under estimation bias. But I push my staff to continue to look for ways to make these results even tighter.

I am fully aware of the scrutiny our weekly data gets each week and the importance the marketplaces on these reports, not just for stocks, but for all the elements and all products. So, I push my staff to apply best methods and rigor in the short time we have to get out our weekly estimates. We assess our results against the later received monthly data we collect too and also other available third-party sources, which I’d encourage all analysts to do as well. I’d argue that we come very close in almost every case for the vast majority of elements, but one shouldn’t expect perfect precision given the complexity and reality of survey sampling. But I’m proud of the work my team does and the high quality we produce even as we look to keep getting better, no doubt there are opportunities for that.

 Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. We had a great response to our Money Show in San Francisco! Watch for our Videos! Thanks to all. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group.  Twitter: @energyphilflynn |Facebook: Phil Flynn

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