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Page added on December 12, 2017

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EIA Bashers Should Check Their Own Numbers

Consumption

Summary

Empirical data does not support multiple recent allegations that the EIA’s reporting or forecasts are “wrong.”

The wave of frivolous accusations against the EIA in the blogosphere preys on the least protected category of investors.

A competent, independent, bias-free EIA must be safeguarded.

This idea was discussed in more depth with members of my private investing community, Zeits OIL ANALYTICS.

Bashing the EIA (U.S. Energy Information Administration) has become trendy of late among a certain category of bloggers. However, the allegations that the agency’s analytics are “wrong” often turn out to be without substance or even without demonstrated understanding of what the EIA does.

Disappointingly, the outbreak of the “can’t trust the EIA” fever among sensation-seeking amateur writers has coincided with less-than thought-out criticisms by some respected industry insiders and weak coverage of the subject by major financial news outlets.

Unmerited attacks on the agency can produce harmful side effects, as such attacks promote mistrust towards the valuable public service the EIA provides and facilitate misconceptions, “myths” and conspiracy theories regarding the industry’s fundamentals. Such myths and conspiracy theories prey on the least protected category of investors – those who are not equipped to distinguish facts from fact manipulation.

Are the EIA’s Forecasts As ‘Flat Wrong’ As Some Critics Claim?

The recent criticism campaign has targeted the agency’s petroleum analytics. Specifically, the STEO forecast of U.S. oil production has been alleged to be outlandishly optimistic. In addition, the EIA’s weekly estimates of U.S. current crude oil production have been claimed to be far too high.

Perhaps the most high-profile criticism of the agency’s forecasts has come from the industry veteran Harold Hamm, CEO of Continental Resources (CLR), a leading U.S. shale operator. Mr. Hamm’s view echoes that of Domestic Energy Producers Alliance (“DEPA”), an E&P industry association and lobbying group chaired by Mr. Hamm.

During the last several months, Mr. Hamm repeatedly suggested that the EIA’s U.S. crude oil production forecast for the remainder of this year is unrealistically high, calling it “flat wrong” and “way off.” For instance, in a September 20, 2017, interview with Fox News‘ Maria Bartiromo, Mr. Hamm argued that the EIA’s 2017 exit rate forecast should have been revised much lower:

Recently, with their September Short-Term Energy Outlook, they made an adjustment of 130,000 barrels [per day] down. It should have been about 500,000 barrels…

We are showing about 9.35 – 9.4 million barrels by the year’s end for the U.S. In comparison, their prediction was 9.8-9.9, close to 10 million barrels.

They are way off. They need to adjust.

The interview generated a mini-sensation headline: “EIA forecast error keeping oil prices low: Harold Hamm.

In an interview with Bloomberg on September 21, Mr. Hamm suggested that the EIA’s forecast is “flat wrong,” overestimating the exit rate by ~360,000 barrels per day. The interview generated another mini-sensation: “Harold Hamm Says EIA Shale Forecast Is ‘Flat Wrong’.”

The list of similar headlines from major news organizations with nation-wide reach can continue on. Just to add few examples:

The headlines from mainstream media were amplified by sensation-hungry financial bloggers, some of which rushed to plagiarize the idea that the EIA is “flat wrong” and launched criticism attacks of their own, often pedaling invented allegations.

Of note, it appears that since September, DEPA has quietly revised its own forecast. DEPA’s November 16 presentation alleges that the EIA is “still overstating” 2017 Exit production rate by “220,000 b/d or more,” which is different from the 360,000 “overstatement” DEPA alleged in September. The new figure appears to put DEPA’s forecast at 9.5 MMb/d (or less), or 100,000-150,000 barrels per day higher than in September.

(Source: the EIA)

Burden Of Proof

One might wonder, what makes Mr. Hamm and DEPA so convinced that the EIA’s production forecast is off target?

DEPA’s November 16 presentation dedicates one slide to supporting its own forecast:

(Source: the EIA)

Given that this is the only slide providing some rationale behind DEPA’s outlook, one is left wondering if their forecast is derived mostly from the presumption that the historical growth rate observed during the 12-month period from September 2016 through August 2017 (59 kb/d per month, per the slide) will remain unchanged in the next several months.

The presentation provides no quantitative arguments why this should be the case. Neither does it explain why the scenario where U.S. production growth increases to a higher rate – the one implied by the EIA forecast (129 kb/d per month, per the slide) – should be completely ruled out.

Frankly, the presentation is a puzzling disappointment. After the highly public and harsh criticism campaign, the material fails to show evidence that any real work has been done by DEPA to develop its own estimate. If this is an original forecast, analytical support should not be a secret and should be presented. If DEPA is relying on third party forecasts, proper attributions and relevant excerpts of supporting analysis should be included. Neither is the case.

Given that DEPA has not shown any meaningful supporting analysis, its own estimate – the way presented – appears to fall short of the standard for a forecast and comes across as an intuitive guess.

Regardless of the way derived, DEPA’s uncompromising conviction that the U.S. crude production cannot accelerate during the second half of 2017 – as implied by the EIA’s forecasts – appears to ignore three arguably obvious factors.

First, August 2017 production – the latest monthly survey result shown on the graph above (the black dashed line) – was impacted by Hurricane Harvey, which masked a stronger underlying growth trend. For anyone in the industry, the hurricane impact should be almost impossible to overlook.

Second, completion activity had been on the rise throughout the year, which hints, at least at an intuitive level, that growth acceleration in the second half of the year is more likely than growth at the same pace or growth deceleration, as compared to the preceding 12 months.

Finally, the increase in prices since mid-summer has likely boosted operator confidence and should stimulate incremental completions in the fourth quarter.

These considerations speak in support of the EIA’s forecast.

The claim that the EIA’s forecast is “way off” needs to be substantiated. DEPA’s presentation on November 16 fails to do so.

Reality Check

On November 30, the EIA released the results of its 914 survey for the month of September. The report showed a sequential increase in U.S. production volumes that significantly exceeded the average for the preceding 12 months. If one were to adjust for estimated hurricane impacts in August and September – as shown on the graph below – the catch-up in the pace of growth after a slow second quarter looks even more convincing.

If one were to adjust for estimated 0.1 MMb/d production lost or deferred due to hurricanes during September (OIL ANALYTICS‘ estimate), the September 2017 production rate reported by the EIA would have been 9.6 MMb/d.

In other words, the adjusted rate for September is already trending 200,000-250,000 b/d higher than the 9.35-9.4 MMb/d estimate for year-end production stated by Mr. Hamm in his interviews in September as a basis for “the EIA’s forecast is flat wrong” claim.

Even if U.S. production ends up exiting the year with no further growth, at 9.6 MMb/d as adjusted for temporary hurricane impacts, the exit rate would be just 0.1 MMb/d below the EIA’s estimate of 9.7 MMb/d. Moderate growth would put the EIA’s estimate below the actual outcome.

So far, based on the EIA’s data through September, allegations that the EIA’s forecast is “wrong” are not supported by empirical results.

Within Precision Range

Any forecast has a precision range.

Predicted data points are effectively ranges of outcomes characterized by some probability distribution. Presented forecasts are typically simplifications that narrow down the family of predicted outcomes to some sort of a “base case” or a highest probability prediction.

Forecasts are also simplifications of reality. Actual results are impacted by a variety of factors, many of which are not predictable or are beyond the forecaster’s ability to obtain or process the information. Production growth or decline can be “lumpy” month to month, whereas the forecast would rely on smooth assumptions.

In addition, as a practical matter, any forecast of U.S. production is effectively judged against the reported monthly data produced by the EIA. The monthly reports are based on the agency’s selective survey and in their turn, due to the vast volume of data being surveyed or estimated, are characterized by their own precision ranges (measurement error).

As a result, the precision range of any production forecast is inevitably wide.

Taking into consideration the precision range aspect, the EIA’s current forecast through December 2017 does not appear “flat wrong.” Moreover, there is a chance that the EIA’s current forecast of 9.7 MMb/d for December will end up below the actual result (which would not necessarily make the forecast “wrong” – a forecast is a forecast).

Is The EIA’s Forecasting Process Adequate?

Goes without saying, the EIA should strive to continuously improve its process and service, which is invaluable to the industry, investing public, and the society as a whole. Constructive suggestions, criticism, and debate are healthy, helpful, and appropriate. Competition and checks and balances are a must.

In this regard, it is particularly sad that the focus of the recent avalanche of criticisms has been on a specific figure in the forecast. Professional, constructive discussion of how the EIA’s process and product design can be further perfected has been absent.

Demanding that the EIA change some of its estimates is a naïveté that can only pass before non-specialist audience remote from the industry or serious finance. The EIA’s forecasts are systemic and are an output of a certain process. To compel an estimate change, one needs to point to a specific breakdown in the workflow or an omitted factor. A subjective “on demand” change to the forecast is hardly an option as it would be a serious breach of integrity by the EIA’s team.

The EIA’s process is fairly transparent and is available for public review both in summary and in detail.

(Source: the EIA, November 2017)

Unfortunately, constructive initiatives to help the EIA to broaden the scope of its analysis and perfect precision may not come naturally from the industries that the EIA surveys or leading private sector consultancies which have the expertise in the matter.

While industry participants benefit handsomely from the EIA’s work, the agency has to impose reporting obligations on individual operators. Moreover, the increased transparency ultimately helps to reveal operational leaders and operational laggards, which some industry participants may see as being not in their best interest.

The EIA’s work, most of which is offered for free, directly competes with expensive, for-fee services offered by industry consultants. In fact, in many areas, the EIA has a unique advantage over private sector information providers and forecasters. The biggest one is the Administration’s ability to survey industry participants to produce unique, highly valuable integrated information sets. A combination of such vastly superior primary-source information access and leading-edge analytics would tremendously benefit general public but could reduce revenues and margins for some consultancies.

The EIA can also be viewed as a factor that erodes the “edge” that big traders have over smaller traders and investors by being able to afford private information and analysis from high-fee consulting firms.

Ultimately, a well-funded, competent, bias-free EIA providing accessible and intelligent information at low cost is objectively needed by the industry and society. However, the support may have to come from the users of the EIA’s services.

Are The EIA’s Forecasts Depressing Oil Prices?

Mr. Hamm has stated on multiple occasions that the EIA’s allegedly wrong forecast is depressing oil prices. In the interviews, Mr. Hamm suggested that “everybody listens to the EIA as they are the government authority here in the U.S.”

The statement is certainly valid in the part that the EIA carries the noble burden of responsibility to provide the highest quality information and analysis to the public. The U.S. industries, investors, economists and users across the world rely on the EIA’s competence, thoroughness, and integrity. However, the claim that the forecast is depressing oil prices raises eyebrows.

Mr. Hamm and DEPA have alleged that the EIA’s current forecast had a negative impact on prices as great as $10 per barrel. To justify the claim, they draw an analogy with the increase in supply from Libya and Nigeria earlier this year (of note, actual, not projected by one of many forecasters in the market). In their interpretation, oil prices declined by $10 per barrel in reaction to an unexpected 460,000 barrel per day increase in production by these two exporters. Based on this parallel, Mr. Hamm and DEPA have argued that a downward revision by the EIA of the agency’s estimated 2017 exit rate to the “correct” lower amount would result in a ~$10 increase in oil prices:

If you look back when Nigeria and Libya brought on an extra 400,000 barrels, the price was hit some 20%, it went down $53 to $43, and we feel like that’s about the adjustment that’s due right now.

As a reminder, WTI price indeed traded as low as ~$43 per barrel last summer, even though those price levels were short-lived. However, the link between a specific price move and a single fundamental factor is a subjective interpretation. The claimed $10 per barrel impact on price comes across as particularly subjective and presented without analysis.

(Source: the EIA)

There is no question that an unexpected increase of supply can have a material impact on prices. There is also no question that the outlook provided by the U.S. EIA can have an impact on market psychology, even though the market has a large number of competent forecasts to choose from and should not be patronized as it relates to its ability to form a view of the economic and operational reality based on the totality of available information.

However, the entire concept that someone might be attempting to correct the price of oil by $10 per barrel via convincing the EIA, a government agency of the United States, to change their forecast is something very unusual.

An Independent, Bias-Free EIA Must Be Safeguarded

Goes without saying, the EIA should strive to continuously improve its process and service. But it is also critical that the agency maintain its independence of undue external pressures and manipulation.

Full independence, integrity, and transparency of the EIA’s reporting and analytical work is an asset that belongs to our society as a whole and is being funded by our society as a whole. Developing and safeguarding this asset is important.

seeking alpha



14 Comments on "EIA Bashers Should Check Their Own Numbers"

  1. Makati1 on Tue, 12th Dec 2017 7:08 pm 

    “But it is also critical that the agency maintain its independence of undue external pressures and manipulation.” What “independence”? Wall Street owns it.

    Another supporter of the EIA’s lies. How do you get truth from lies reported by EVERY FF provider on the planet? Answer: you don’t. Garbage in. Garbage out.

    That’s why I don’t waste my time reading the oily junk. They should ALL start with “Once upon a time…” Or: “We guess this is the case and guess that…”

    BTW: “…a government agency of the US…” is NOT exceptional. It is just another mouthpiece of Wall Street.

  2. Apneaman on Tue, 12th Dec 2017 7:38 pm 

    Guy gets raving mad about barrel counting.

    Chicks dig that.

    “Oh Alpha, your barrel counting passion gets me moist…..Take me man-beast!!”

  3. Boat on Tue, 12th Dec 2017 7:49 pm 

    mak,

    Your full-o-shut meter is pegging high again. For example the last 2 years the eia projected global demand at 1.2 mbpd growth. Both years ended up at 1.5 mbps. How did those misses help wall street or the government?

  4. Boat on Tue, 12th Dec 2017 7:52 pm 

    Those who do not read about oil seem to discount knowing about it. Plenty of time to trash the reporting. Lol Boys will be boys.

  5. Makati1 on Tue, 12th Dec 2017 7:55 pm 

    A snapshot of where the US troops are today … and where they invaded yesterday. The warmongering country…

    “All The Countries America Has Invaded… in One Map”

    Also: a map of all of the current countries with American troops stationed.

    https://www.globalresearch.ca/all-the-countries-america-has-invaded-in-one-map/5606068

    And Americans wonder why the rest of the world hates them. Hint: It’s NOT for their freedoms. LMAO

  6. Makati1 on Tue, 12th Dec 2017 7:58 pm 

    Boat, the number of barrels or the price today only interests fools still in the market casino, not the average human who doesn’t know or care. It will be the capitalist financial system that brings the US to its knees, not how much oil is left or the price tomorrow.

  7. Boat on Tue, 12th Dec 2017 8:04 pm 

    High priced oil can bring any system down. Kinda important dude. The real world is watched in numbers that are affected by human/natural events. No matter what it takes money to survive.

  8. MASTERMIND on Tue, 12th Dec 2017 8:39 pm 

    Madkat

    Here is what one nuke plant melting down did to all of Europe. Now just imagine when hundreds of them worldwide melt down post economic collapse…You are going to be coughing out your internal organs…

    https://imgur.com/a/iZbXr

  9. dissident on Tue, 12th Dec 2017 8:50 pm 

    Chernobyl did f*ck all to your precious Europe. Most of the remote fallout that mattered (i.e. cancer level amounts and not blips above background) was in Belorus. The local fallout around Chernobyl is the hottest zone, by far.

    Plopping some smeared out graphic without numerical context and yelling “proof” is utter BS. Here is an actual map of ground level deposition and not some art:

    http://www.unscear.org/unscear/en/chernobylmaps.html

  10. Makati1 on Tue, 12th Dec 2017 11:07 pm 

    MM, Do you ever consider that they will be shut down slowly? NOPE! That thought is too realistic. Do you think that thousands of nuke plant workers, who live in the area, are going to just walk away and kill themselves and their families with radiation? I don’t think so.

    The storage pools will be a problem, but they will likely be just buried and forgotten. The area near them will be radioactive, but not explosive.

    But then, collapse does not mean the end of everything, just a lot less. More like the 3rd world today. A tragedy for Americans, but normal for most of the world’s population. Adjust.

  11. Alice Friedemann on Wed, 13th Dec 2017 12:20 pm 

    I don’t think the EIA deliberately is wrong. Their main problem is that they are woefully understaffed and unable to afford the necessary salaries for top geologists and other experts.

    I may have found a case where the EIA has under-reported data. Their EIA 2016 recoverable coal reserves aren’t way down for Montana and Wyoming despite the USGS 2015 survey of the Powder River Basin, where we get over 42% of our coal.

    EIA: Table 14. Recoverable Coal Reserves and Average Recovery Percentage at Producing Mines by State, 2016 and 2015
    Recoverable coal reserves
    Montana 2015: 817 2016: 823
    Wyoming 2015: 6,681 2016: 6,220

    2015. Coal Geology and Assessment of Coal Resources and Reserves in the Powder River Basin, Wyoming and Montana

    Check out page 188, Figure 136. Graph showing cumulative cost curve for the Powder River Basin, Wyoming and Montana (Gillette coal field, Northern Wyoming Powder River Basin, and Montana Powder River Basin assessment areas)

    A curve shows what prices per short ton make how many billion short tons economically
    possible and transformed from resources into reserves. Here are a few.
    Price per Reserves
    short ton Available (BST)
    $15.15 43
    $10.00 23
    $ 8.90 10

    Prices are roughly $12/short ton now, so roughly 30 BST in reserves are available, a tiny 2.3% fraction of the resource.

    Here’s what USGS researchers who wrote the report had to say:

    “You’re looking at a forty-year life span, maximum, for Powder River coal,” said USGS geologist Jon Haacke, one of the authors of the analysis.

    Claims that the U.S. had reserves sufficient to last as long as 250 years came from greatly inflated estimates of how much coal could be mined, Haacke added. They were based on data put out by the U.S. Energy Department last updated comprehensively in the 1990s.

    USGS study leader James Luppens said the Energy Department estimates were in “desperate need of revision.” But there are no immediate plans to do so or to incorporate the new findings, said Lance Harris, a supervisor with the Energy Department’s coal team.

    For decades, the agency has made little distinction between coal reserves that reasonably could be mined and those that could not.

    To gauge how much coal remains, USGS researchers since 2004 have analyzed the geology from minerals removed by 30,000 holes drilled deep into the earth. The data revealed almost 1.1 trillion tons of coal buried across the 20,000-square mile Powder River Basin. Of that, only 162 billion tons is within coal seams considered thick enough and close enough to the surface to make extracting them worthwhile.

  12. MASTERMIND on Wed, 13th Dec 2017 12:33 pm 

    Madkat

    When the workers at the nuke plants get the news that the stores are running out of food and such and their wives/girlfriends, kids call them panicking because there is no rule of law anymore…They will for sure leave the plants and say fuck it. You think they will stay for days upon end while the world is burning down around them? The second their cell phones go offline they will flip out and fly home. They will be smart enough to know this is the end of the world and they will want to spend the last remaining time they have left with their families.

  13. Apneaman on Wed, 13th Dec 2017 10:54 pm 


    New, Major Evidence That Fracking Harms Human Health

    A child born very close to a well is likely to be smaller and less healthy than a child born farther away.

    https://www.theatlantic.com/science/archive/2017/12/data-from-11-million-infants-suggests-fracking-harms-human-health/548315/

    Frackers don’t care if fracking creates some mutant rubber headed babies.

    Hell NO. They just want to get paid then go home and brag on the Internet about how much money they made and spread climate denial lies and be apologists for the Cancer industry.

  14. Apneaman on Wed, 13th Dec 2017 11:10 pm 

    California’s devastating wildfire season is part of a larger trend — here’s how much worse it has gotten

    “California’s wildfires are getting worse: 14 of the 20 largest wildfires in the state have happened since the year 2000, according to an analysis.

    The state spent $505 million fighting fires in 2017, and if trends continue, that cost will continue to go up.”

    “Because of climate change, the average wildfire season lasts at least 2 1/2 months longer than it did in the early 1970s. And the amount of land burned in the US since 1984 is double what would have been expected without the effects of climate change.”

    ” Here’s the list of the fourteen largest fires since the year 2000, from Climate Nexus:

    December 2017: Thomas, 230,500 acres
    September 2016: Soberanes, 132,127 acres
    July 2015: Rough, 151,623 acres
    August 2014: Happy Camp Complex, 134,056 acres
    August 2013: Rim, 257,314 acres
    August 2012: Rush, 271,911 acres
    August 2009: Station 160,557 acres
    June 2008: Klamath Theater Complex, 192,038 acres
    June 2008: Basin Complex, 162,818 acres
    October 2007: Witch, 197,990 acres
    July 2007: Zaca, 240,207 acres
    September 2006: Day, 162,702 acres
    October 2003: Cedar, 273,246 acres
    July 2002: McNally, 150,696 acres

    Between 1930 and 1999, there were only six fires over 100,000 acres in California, according to Climate Nexus.

    As larger fires burn in the state, fire-related expenditures are also increasing. Climate Nexus calculated that in the 2017 fiscal year (which ends in October), California’s Department of Fire and Forestry protection spent $505 million fighting fires across the state. Twenty years ago, in 1997, the state spent only $47 million.”

    http://www.businessinsider.sg/ventura-county-la-fires-california-worsening-trend-2017-12/

    California’s wildfires are driven by climate and human error

    https://www.newscientist.com/article/mg23631560-200-californias-wildfires-are-driven-by-climate-and-human-error/

    Half a $Billion dollar$ for one state for one long wildfire season. Ya they can do that forever.

    Just imagine how much it would cost if not for all the cheap convict firefighters.

    Most will not be burned and flooded out by AGW, but you still have to pay for much of it until it breaks the bank. Then the fun begins.

    Look how these shit for brains half wits get hit with AGW consequences, get taxpayer/BIG GOVERNMENT bailed out then rebuild in the same fucking spot even when they know they should not.

    Special Report: Unfettered construction raises U.S. hurricane costs

    “Floodwaters aren’t the only common thread in the two men’s stories. Also linking them is this: Neither should have been living in harm’s way.

    Becerra’s and Keeble’s homes were built or rented out in violation of National Flood Insurance Program rules. Like thousands of others in the hurricane-ravaged Florida Keys and on the Texas Gulf Coast, such houses are undermining efforts to limit flood damage, lower the cost of disaster assistance and reduce claims on the taxpayer-backed federal flood insurance program, a Reuters investigation found.”

    “Similar rule-busting construction has happened in scores of communities across the United States, where local, state and federal officials have failed to enforce regulations intended to restrict building in areas at high risk of flooding.

    Across the country, newer construction in flood-prone areas generated more than $9 billion in claims for structural damage on the cash-strapped flood insurance program between 2000 and 2015.”

    https://www.reuters.com/article/us-usa-floods-insurance-specialreport/special-report-unfettered-construction-raises-u-s-hurricane-costs-idUSKBN1E61DH

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