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The 165 Million Barrel Crude Oil Revision

Summary

  • The EIA has become infamous for revising their U.S. crude production estimates.
  • The latest translates into a 165 million barrel crude supply shift from now until late 2016.
  • Their forecast now looks more reasonable, except for a rebound in late 2016 because it is based on higher crude prices than the NYMEX strip.

During the dog days of summer, energy analysts in the sultry nation's capital decided that their petroleum supply model needed more tweaking and out came a new forecast on August 11th. (See graph below which compares the July forecast to the August forecast.)

The Energy Information Administration's (EIA) - also suspected by some as the Energy Dis-Information Administration - revised forecast for future US crude oil production amounts to a whopping 165 million barrel shift between August 2015 and December 2016.

It did not precipitate a bullish market response, as all eyes were on the devaluation of the Chinese Yuan that day. And "smart money" has probably discounted EIA's revisions by now.

But this one may actually be more on track.

A week before, Continental Resources (NYSE:CLR) had reported its second quarter earnings and revised its guidance for production through year-end. It increased its estimated output gain v. 2014 from 19% to 23%. It had previously predicted a growth of 16% t0 20%. These estimates show that they have a good handle on what they can do.

Their prediction going forward is that production at year-end will be running 5% to 7% lower than the second quarter average. In the EIA's forecast in July, it was expected just a 2% reduction in the same comparison, which looked too small. With the August revision, they are now projecting a 5% drop in output by year end, comparable to low-end of the CLR projection. This seems more realistic.

In 2016, the EIA is projecting a rebound in the latter half of the year. This appears to be based on higher price expectations than the market expects (see graph). The EIA projects prices will rise into the high $50s, thus providing support for a rebound in production. It is curious why a government agency would, in effect, be saying the market is wrong and they are right when it comes to future prices.

Conclusions

The EIA has revised their forward projections of crude production. The revisions appear to be more realistic. They imply a 165 million barrel reduction of crude available to inventories. This does not mean inventories will fall by that much, it is just a sizable shift in the supply curve.

The EIA projects a rebound in production by late 2016. But that is based on higher futures prices materializing than the market as a whole currently expects. There are too many uncertainties at this time to put much faith in that outlook.


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