There is a flag in the play. The EIA Energy Information Administration (EIA) sparked the biggest amount of outrage since the holding call against the Eagles in the Super Bowl, states Phil Flynn of PRICE Futures Group.
The EIA reported a record-breaking weekly adjustment of 2,669 million barrels of oil a day to their weekly supply data, or just a mere 13,769 million barrel weekly adjustment. That huge adjustment has oil traders calling foul and throwing things at their screens and they want their money back. Of course, they will have as much luck with that as they will have to get your Eagles to win bets back. Yet this is a growing source of irritation that the EIA model can be more broken at a time when the risk to the global oil supply has been this high. In fact, the adjustment is so large that market watcher Tin Dallinger says that the EIA should change its name to the “Adjustment Bureau”.
The adjustment helped play into a massive almost record-breaking 16.3 million barrel increase in weekly crude oil supply that catapulted supplies from about 3% above the average range for commercial inventories to a healthy 8% above the average range. Yet with SPR inventories down 213,000 million barrels from a year ago, are things really what they seem? Myra P. Saefong at MarketWatch wrote the US Energy Information Administration’s weekly petroleum supply report released Wednesday included an upward “adjustment” to last week’s US oil supplies—one of the larger ones reported in the government data. The change can be seen simply as a “balancing item,” as the EIA describes it, but can also lead to volatility in the oil market as traders digest it, analysts said.
The change “suggests that the EIA underestimated not only domestic crude production but also likely underestimated net imports of crude and overestimated refinery runs,” said Troy Vincent, senior market analyst at DTN. The “adjustment” line itself isn’t unusual. It’s included in the EIA’s US petroleum balance sheet tables each week. The size of the latest weekly rise in inventories is notable, though the EIA pointed out to MarketWatch that the size of the latest adjustment was “surpassed twice in 2022.” In a footnote on the report, the EIA said the adjustment, formerly known as “unaccounted-for crude oil,” is a “balancing item.”
When asked for comment on the adjustment, the EIA pointed to a Nov. 30, 2022 tweet thread from Joseph DeCarolis, EIA administrator, which said the adjustment at that time represented “the difference between supply and disposition.” Ideally, “the adjustment would be zero since the crude oil supplied has to go somewhere,” he said, but there is a “degree of uncertainty associated with each term, stemming from imprecise statistical sampling and modeling inaccuracies.”
Yet did inaccuracies mean that last week’s increase was real? There is evidence that we should have got a supply build as the US refining sector has gone into maintenance season hibernation. The EIA showed a very slow crude oil refinery input of just 15.0 million barrels per day down 383.000 thousand barrels from last week. Refineries operated at just 86.5% down over 10% from where they were weeks ago their operable capacity last week. Gasoline production was down to 9.1 million barrels per day and distillate fuel production fell to 4.5 million barrels per day. That left gasoline inventories up by 2.3 million barrels from last week which is a small increase for this time of year and is about 5% below average.
Distillate inventories increased last week. Distillate fuel inventories decreased by 1.3 million barrels last week and are about 15% below the five-year average for this time of year.
The Energy Information Administration recently also admitted that they had been way underreporting US oil demand. My take is the EIA is doing the best it can but you cannot read too much into these numbers as the models are not adding up. The reality is that oil is seeing some weakness due to seasonal swings and warm weather, but that will soon change. Oil held key support and should start ripping higher as refiners start to reopen to meet what will be strong demand. Consumers are clearly holding up well and there are signs that global demand is also going to spike.
China’s demand is rising and that is why Saudi Arabia felt that they could raise prices. India’s oil demand is surging and perhaps US lawmakers should take note of India’s move to abolish the damaging “windfall profit” tax.
First, let’s look at demand. Energy World reported that India’s fuel demand witnessed saw a sharp rebound as month-on-month, the demand was up 13.6 percent, reversing the dip in the previous month. Sales fell 5.1% month-on-month in January as cold conditions cut vehicular movement. Now Oil Price is reporting that India, which introduced a windfall tax on its oil industry last year amid the oil price boom, has now cut the levy for crude oil and the export of jet fuel and diesel, Reuters has reported, citing government information.
The windfall tax was introduced in July last year as Indian refiners decided to take advantage of solid margins driven higher by robust demand and the energy supply disruptions in Europe. This advantage took the form of ramped-up oil and fuel exports to sell at higher international prices while domestic prices remained subdued. More recently, however, refiners have been stocking up on cheap Russian crude redirected from Europe, possibly in anticipation of higher demand for fuels in the near future, after the European Union embargoed most imports of Russian fuels.
Also in another bullish development, Oil Price reported that “Barclays on Wednesday said it would no longer provide financing to oil sands companies or oil sands projects and tightened conditions for thermal coal lending in an updated policy, which fell short of announcing overall pledges or targets in funding oil and gas.”
Even after the shocking report from the EIA, oil prices held key support and as long as they do that, we believe that a move back towards 84 is in the cards next week. Strong US economic data caused the dollar to rally and hit one-month highs which was also a headwind for the price of oil despite the smoke and mirrors and more oil coming from the Strategic Petroleum Reserve we still feel that the market is going to be undersupplied globally in the next couple of months. Underinvestment and the woke anti-energy policies around the globe point to higher prices later this year and more pain for the middle class.
We believe it is wise to start putting on long-term option strategies at the back end of the curve as the globe is heading towards a significant supply squeeze that could last for decades to come. In the meantime, energy is going to become more of a luxury item because the poor will not be able to afford it and the world continues its path to green energy madness.
Dan Molinski at the Wall Street Journal reported investors began betting that Freeport LNG, a plant in Texas shut since a fire in June, is on the verge of a restart and will be back to normal soon. But while regulators in Washington have received a request from Freeport to resume full commercial operations of Phase One, no green light has yet been given. Once that approval to commence liquefaction operations is given, the facility will be permitted to place LNG in two of the site’s tanks, and transfer to ships through one loading dock, sources close to the matter told WSJ.
In Europe, they are taking victory laps over an energy crisis averted. The lack of winter saved the continent. Yet be careful. Oil Price reported that Europe’s natural gas futures point to structurally higher prices for the rest of the year, as Europe will soon have to start filling inventories for the 2023/2024 winter.
Learn more about Phil Flynn by visiting Price Futures Group.
