What the EIA Data Really Tell Us

by | published May 11th, 2012

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…

The Great Push North for Oil Continues

by | published May 9th, 2012

The search for oil on "the roof of the world" got more serious.

Over the weekend, Norway's Statoil ASA (NYSE:STO) signed a massive exploration deal with Russian behemoth Rosneft in a venture that may require more than $100 billion in investment over the next few decades.

Specifically, the company is aiming to help Rosneft develop untapped oil resources in the Arctic, as Moscow struggles to gain a competitive advantage given declining conventional oil and gas production in Eastern Siberia.

The deal highlights a number of key issues for both companies and for Moscow moving forward.

For Russia, some of its most mature conventional oil basins are declining in output rapidly, at a pace that could reach 8% a year within this decade. With production waning and concerns about long-term supplies accelerating, Russia has no choice but to venture into the north.

But they know that they cannot make this push alone.

Such a radical change in procurement is technologically sensitive… and very expensive. Moscow needs outside investment and the most advanced technology to push into the hostile, energy-rich environments of the vast Arctic and East Siberian basins.

At the same time, Statoil has been scrambling to find new ways to get more involved in this push north. In recent months, oil giants Exxon Mobil Corp. (NYSE: XOM) and Italy's Eni SpA (NYSE:E) had been very active in working with Moscow to develop in these oil-rich environments.

In the wake of Russia's slumping reserves and production in Siberia, the Kremlin has been looking for ways to incentivize producers to help Rosneft replace waning production. Tax breaks have been one way, but companies also want a little bit of insurance when they work with Moscow.

The major question, of course, is this: How can shareholders know that Moscow won't expropriate any major resource finds, should the exploration deal succeed?

The answer is "hostage taking."

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