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Page added on July 26, 2016

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Faulty Data? Why The Oil Glut Could Be Much Smaller Than Believed

Consumption Cushing

The oil price rally came to a quick end in June, topping $50 per barrel but quickly falling back again. Optimism stemming from the four-month rally has vanished, and since June prices have retreated back to $45 per barrel.

The main reason for the renewed sense of pessimism comes down to the glut of oil sitting in storage. The U.S. has been dealing with oil stocks at 80-year highs since early 2015, a metric that has become closely watched in the market for signs on whether or not supply and demand are moving closer to balance.

After hitting an all-time high earlier this year, crude oil stocks began to decline in May, and although they are still above 500 million barrels, the industry has steadily drawn inventories down from their peak.

(Click to enlarge)

A more recent worry for the oil markets are the stubbornly high levels of gasoline sitting in storage. The problem of a glut of refined products has emerged as a top concern for oil traders since prices ran into a wall of resistance at $50 per barrel and the data on gasoline stocks became gloomy.

Like crude oil, gasoline inventories also hit a peak earlier this year, but instead of consistent declines, the weekly drawdowns have been anything but. Gasoline stocks have even increased four out of the past five weeks. The refined product glut has killed off the price rally.

(Click to enlarge)

The EIA data releases are a tradition for the oil markets – the weekly publications spark movements in oil prices, whether up or down.

But the tricky thing about international prices trading on these metrics is that they only encapsulate what is going on in the United States. The markets know very little about what is going on in the rest of the world. As The Wall Street Journal notes in a July 24 article, countries such as China and Russia do not report data on their storage levels. In fact, there is very little transparency on market data in much of the world. “The data itself is so inconsistent,” Harish Sundaresh, portfolio manager and commodities strategist for Loomis, Sayles & Co., told the WSJ. “In countries like Nigeria, Brazil, Angola, it’s not trustable.”

There are a few other outlets that release data on oil trends. The IEA offers some data on stocks from the OECD, which encompasses North America, Europe, and other rich countries. The IEA data shows commercial stocks in the OECD rising by 13.5 million barrels from May to June, reaching a record high of 3,074 million barrels. So that data looks pretty depressing for oil prices.

Also, the Riyadh-based Joint Organisations Data Initiative (JODI), for example, compiles data from the IEA, OPEC and a few other agencies. Data from JODI shows that Saudi Arabia has recently begun reducing its inventories to meet both high levels of demand abroad and domestically. In another example, JODI data revealed a sharp drawdown in inventories in Nigeria, mostly due to the attacks from the Niger Delta Avengers on domestic production. Nigeria’s crude stocks declined by 78 percent between December and May, as outages forced the country to tap reserves in order to keep exports from falling. The JODI data provides some small semblance of bullishness.

But with data from multiple sources, which often conflict with one another, is hard to put it all together. And as the WSJ notes, there isn’t data like this from Russia, China and other non-OPEC members. The lack of transparency makes it difficult to paint a clear picture of what is going on in the oil markets.

China, for example, is filling up its strategic petroleum reserve. When comparing imports to refining production, it appears that there is a surplus, meaning that China is stockpiling crude oil. But much of that is likely winding up in China’s SPR, not necessarily commercial storage. If the SPR fills up, and China dials down its imports, that could be bad news for global oil demand. But nobody knows because of the lack of data.

Moreover, even in countries where we think we have good data, there could be some issues that make things murky. Cornerstone Analytics poked holes in the IEA data on OECD oil stocks in a recent research note. The IEA inventory data over the past several months indicates record levels of storage, which can be interpreted as a symptom of weak demand. But the IEA for some reason showed very little change in the inventory levels in Canada in May, despite the 45 million barrels of oil production or so that were disrupted because of wildfires. Cornerstone Analytics says that the IEA data is probably overestimating Canada’s inventories, resting on a faulty assumption of constant production. The consultancy expects the IEA to issue a downward revision to oil inventories in next month’s report.

This may seem all a bit arcane, but the end result from the Canada issue is that inventories may not be as high as everyone thinks, and the oil market could be tighter than many believe. Oil prices have much more room on the upside as a result.

But the larger lesson is that oil price volatility is in part a symptom of a shortage of reliable data. The markets move up and down on incomplete and sometimes incorrect information. When the real trends ultimately emerge only months later, prices can react by moving quickly back in the other direction.

By Nick Cunningham of Oilprice.com



10 Comments on "Faulty Data? Why The Oil Glut Could Be Much Smaller Than Believed"

  1. rockman on Tue, 26th Jul 2016 6:42 am 

    “…the industry has steadily drawn inventories down from their peak.” For the most part the “industry” hasn’t drawn down anything. But speculators playing the contango game did sell a good bit of oil once prices got up to $50+/bbl. Which is the objective of storing much of the inventory: buy low – sell high . And now that prices have retreated how big a shock will it be to see an increase of oil going to storage. Which will be a bit of good news for producers since that oil will represent an increase in purchases from them.

    Yes: declining oil storage volume is typically NOT good news for producers: those contango players are competing with them for the refinery buyers. Not the typical spin from the MSM, eh?

  2. shortonoil on Tue, 26th Jul 2016 7:49 am 

    If oil storage was better in shape in the rest of the world than it is in the US their economies would have to be doing better than the US. We hope Nick sends that message along to the 1 million Chinese steel workers who have lost their jobs in the last year, or CAT who has seen its sales drop for 43 months in a row, or the BDI that has been rock bottom for almost two years.

    More OilPrice dot com BS to suck investors into an industry that can’t even afford to replace the reserves that they are extracting!

  3. Plantagenet on Tue, 26th Jul 2016 2:21 pm 

    The huge amount of oil in storage is extending the oil glut. When prices go up a bit, some oil comes out of storage, increasing the available supply and driving the price down. When the price goes down more oil goes back in storage.

    The oil glut has a bit longer to run.

    Cheers!

  4. PaulApp on Tue, 26th Jul 2016 6:21 pm 

    Not oil glut, but rather oil demand is fake. Crude was simply moved elsewhere such as China and India storage. Now, that peak demand season is over and storage is capped out. There is simply no more room for the coming slow demand Fall and Winter.

  5. Practicalmaina on Tue, 26th Jul 2016 7:44 pm 

    People pushing for Bernie at the DNC. Police in riot gear driving away protesters. I am sure this will be downplayed by the media.

  6. Anonymous on Tue, 26th Jul 2016 9:16 pm 

    What about the huge amount king salmon in storage in your freezer plantaglut? Will that extend the king salmon glut as well?

  7. Rick Bronson on Tue, 26th Jul 2016 9:43 pm 

    Now the word “Glut” is becoming as sexy as the word “Slut”, but not for OPEC.

    Well there are also other factors.
    The amount of fuel used that is used in refineries. Natural gas has seen a significant increase of 12% while many other fuels have gone down. Still gas is mostly Methane & Ethane produced in refineries.

    That means Oil is replaced by Natgas as the refinery furnace fuel which is a major source of Oil consumption.

    So in non-transport sector, Oil is gradually being phased out and more oil is refined into motor fuels like gasoline & diesel. Hence the glut.

    https://www.eia.gov/dnav/pet/pet_pnp_capfuel_dcu_nus_a.htm

  8. Kenz300 on Wed, 27th Jul 2016 7:01 am 

    The top 1% want it all….. and the RepubliCON party will give it to them………..

    What do RepubliCONS believe…….. depends who is paying….. follow the money……. fossil fuels….. oil, coal, natural gas…, nuclear, NRA………the top 1%

    Are RepubliCONS the real EVIL DOERS………..they want to end Social Security, Medicare and access to contraception…….

    RepubliCONS are the reason the middle class is shrinking…… in the past the top 1% wanted to import all the cheap labor they could get ……… now the people are finally waking up but they do not realize they have been conned by the RepubliCONS……….

    The RepubliCON elite want cheap labor…………They are no friend of the middle class

  9. Dredd on Wed, 27th Jul 2016 3:02 pm 

    The Oil Gluttons are much smaller than they believed (On Thermal Expansion & Thermal Contraction).

  10. Mark Ziegler on Wed, 27th Jul 2016 7:09 pm 

    Large oil stocks are good for a war.

    Cybersleauth

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