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What the EIA Data Really Tell Us

by Dr. Kent Moors | 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…