What the EIA Data Really Tell Us
Until yesterday, crude oil and gasoline prices were both retreating.
West Texas Intermediate (WTI), traded on the NYMEX, shed 8.7% since May 1; meanwhile, the RBOB (Reformulated Blendstock for Oxygenate Blending) gasoline futures contract on the NYMEX has declined 6.1% since April 27.
WTI is down six of the last seven daily trading sessions, while RBOB is down six of the last 10.
In each case, we are back to price levels not seen since early February. Some of this results from concerns over Europe, while tunnel vision market watchers continue to point to lethargic demand on both sides of the Atlantic.
Well, enjoy it while it lasts, because this is the lull before the storm. And this storm will find geopolitical tensions, demand and supply constrictions all converging during the same period to shoot up prices.
It’s no longer whether this takes place; the question is only when it will hit.
The harbinger of the market imbalance is unfolding weekly. Every Wednesday, the Energy Information Administration (EIA), a division of the U.S. Department of Energy, releases figures detailing what the oil picture looked like as of the previous Friday.
The recent trend has actually been up in inventories, seen by the talking heads on TV as an indication of stagnant demand. That demand level, in turn, is considered a barometer of everything from consumer sentiment, to industrial expansion, through employment prospects, investment levels, and productivity.
Traditionally, demand for oil products had been regarded largely as an effect of the economic climate. Lately, however, it is seen as the cause prompting the ups and downs in a whole range of market indicators.
Of course, it is never simply one or the other.
And in some cases, such as the period in which we now find ourselves, it really does not tell us very much at all. This is because it is not so much perceived levels of demand these days that trigger the pricing dynamics.
Remember, even if demand is considered the primary catalyst, it is not U.S. or European demand that determines market direction. This is a global market, and prices are more the result of developing nation needs and actions.
Yet, the EIA data are still telling us something very important. It is found in the relationship among three factors: refinery capacity; crude oil inventories; and gasoline and distillate (the category including diesel and low sulfur content heating oil) production.
The figures issued Wednesday (May 9) – showing us what the market looked like on Friday (May 4) – are a good case in point. The data were appreciably different from the estimates given by traders surveyed the day before. Such a result is hardly unusual. Over the past four years, surveyed pundits end up wrong at least 70% of the time when the EIA releases its figures a day later.
The interesting lesson is found in what the figures actually reveal.
Inventory Figures Sending Different Signals
Last week, U.S. crude oil refinery inputs averaged 14.7 million barrels per day, up marginally from the week earlier. Meanwhile, refineries operated at 86.4 percent of their operating capacity, with gasoline at 9.1 million barrels and distillates at 4.4 million barrels per day.
OK, so far it looks like refineries continue to keep back capacity while production is under control. Well, sort of.
Because the EIA also reports that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.7 million barrels from the previous week. At 379.5 million barrels, those oil inventories are above the upper limit of the average range (last three years) for this season of the year.
Yet, total motor gasoline inventories decreased by 2.6 million barrels last week and are in the middle of the average range. And finished gasoline inventories and blending components inventories decreased last week, along with distillate fuel inventories decreasing by 3.3 million barrels for the week, ending up in the lower limit of the average range.
The widening surplus of oil inventories in these weekly energy snapshots are not reflected in product. While crude rose 3.7 million barrels, the combined gasoline and distillate production was down almost six million barrels.
Added to this spread is the refinery utilization figure coming in well below the level of refining capacity. More oil stored along with less products refined results in shrinking inventory. Now that would seem to point to less demand, according to the traditional view.
Except something else had been stalking the figures over the past month.
As refineries balance rising unconventional oil production domestically with continued imports, so also do they need to balance the price of WTI and that of Brent set in London. Brent is more expensive, and it is also used as the benchmark to determine the daily export prices of more crude worldwide.
If the refineries anticipate that prices for raw material will be increasing, they will increase crude inventories up front, while cutting refinery runs. In short, they will stockpile crude and reduce operational capacity utilization to maximize the forward retail pricing potential.
A declining inventory of gasoline and distillates results, made more so by the exporting of oil product out of the U.S., a practice that has been increasing.
What if they get these calculations wrong and demand increases? In the short term, that excess demand is filled by importing gasoline and diesel.
The raw martial inventory speaks of expected crude price hikes coming. Meanwhile, the declining gasoline and distillate stockpiles telegraph that the refiners are restraining product from the market to increase profit margins at a later date. The practice is accentuated by excess spare processing capacity at the refineries.
All of this has less to do with demand and more with manipulating the supply of oil products available to emphasize higher profits down the road.
So, get ready.
P.S. By the way, yesterday I raised my target price for oil – significantly.
You probably received an email from Alex about it earlier.
But if you missed it, a major event is now just seven weeks away that will have profound effects on the market. And oil at this target level is set to have significant effects worldwide – many of which the world is not prepared for. Yet the most significant effect of all – for you, anyway – will be the extraordinary amount of money this situation is likely to create.