In the latest
weekly production data from the EIA, on the back of recent March
revisions, the U.S. managed to post a 76,000 barrel per day increase in the
lower 48. Production from Alaska fell by 61,000 barrels per day, putting
overall U.S. output 15,000 barrels per day higher for the week ending June 12
compared to the previous week.
This comes at a time when multimillion barrel draws have become the norm.
It is important to note that lower 48 production is estimated based on an EIA
black box model, while Alaska is virtually real time data. That suggests that
the weekly supply estimates are hugely overestimated.
These weekly supply numbers are then used as a basis to jump to the
conclusion that the markets are suffering from too much supply. As stated on
OilPrice.com many
times
before, the amount of "over supply" vs. the averages in the U.S.
according to the EIA amounts to tens of millions of barrels of oil.
I continue to maintain that the EIA revision to production came very
suspiciously at exactly the same time inventory draws began, as did the
"Miscellaneous to Balance" figure used in calculating inventory.
The chart below clearly shows when this figure started to grow and by what
amount. It totals more than 30 million barrels since April and has been
rising, which is virtually all of the oversupply above the mean in the U.S!
To reiterate that number is at discretion of the EIA and is not an actual
data point but an "adjustment."
Data Errors Have Real World Consequences
This figure, as created by the EIA, has (with the media's
help) created the impression of a huge oil glut in the U.S. market. No
one, either within the media or the industry, has asked for clarification of
this number and it is instead taken as gospel. This is now wreaking havoc in
energy states such as Texas, as well as threatening most oil companies as
well as tens of thousands employed within the oil and gas industry. With such
importance placed on a number which has impacted not only billions of dollars
in company revenue but many lives for the worse, how can it be largely
unchallenged by all but a few in the media?
Whether this is tied to sheer incompetence or some other, more sinister
reason, the number should be as accurate as possible. The consistent errors
put the vast majority of small E&P companies at risk. The EIA, at its
sole discretion, has had the power the dramatically affect the sentiment and
prices of an entire industry and in some cases completely obliterate it. The
magnitude of the errors is mounting by the day as are the consequences.
Natural Gas
On a separate note, one has to wonder about the goings on with natural gas
prices given that they are holding at only 10 percent above their yearly
lows. Stocks, as reported this morning, are still healthy at 1.4 percent
above their 5 year average but this number may be a bit misleading. Demand
tied to coal switching is quite frankly soaring and is at record highs. To
reiterate, this comes at a time when natural gas production is poised to
decline. One of the largest natural gas producers in the U.S., Chesapeake
Energy, is expected to start seeing 5 percent declines in 2016 production
according to UBS, as Free Cash Flow (FCF) continues to be hugely negative at
nearly $3 billion through 2016 as debt/EBITDAX (Earnings Before Interest,
Taxes, Depreciation, Depletion, Amortization and Exploration Expenses) soars
to over 5X. This comes as hedges roll off in 2016. With FCF being negative
throughout the group, the problem starts to look like a serious issue. There
will come a day of reckoning when capital expenditures dry up as demand
continues and the data distortions on estimates finally become clear to the
markets. It won't be pretty for prices down the road and it will come as a
result of capital budgets getting slashed based on artificially depressed
prices. When this occurs everyone should re-read this article as I'm sure the
cries from soaring prices will become very loud. The E&P space won't be
the cause but the victim in all this. Data distortion by government agencies
has serious consequences on capital investments.
