Missing Barrels

Jim Brown
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The International Energy Agency (IEA) has misplaced about 1.2 mbpd of crude. They claim production is one number and demand is another. The difference is about 2.0 mbpd but global inventories are only rising 800,000 bpd. Where did the oil go?

The IEA is the global energy watchdog for 29 energy-importing nations. It is their job to track supply and demand and let the member nations know about any trends that are developing. The issue periodic reports and project future supply and demand.

That is great for the global energy sector as long as we can believe the numbers. Unfortunately the IEA can't be everywhere and sometimes oil appears or disappears. Kurdistan made numerous cargoes disappear over the last year when they were selling oil without Iraq's permission. Ships would leave port, turn off their transponders and disappear. Sometimes they would been seen by spotters in remote coves offloading oil into another tanker so that Iraq could not determine who eventually bought the oil and place a claim on it.

The problem the IEA has today is not that cloak and dagger. OPEC countries are notorious for misreporting their production. In the past when quotas mattered they always underreported to avoid facing Saudi Arabia's wrath. Today nobody cares because everyone that can is producing over their quota. The quota is completely ignored so there is no reason to misreport.

The IEA has a number on their spreadsheets called "miscellaneous to balance." For common people like us that represents the 59 cent discrepancy that we add in when we are trying to balance our checkbooks at the end of the month. After going over the debits and credits several times and we are still left with some odd amount we just add an entry called bank error or math error for that amount and bingo, our checking account is now balanced.

For the IEA it is a little more complicated. They can't keep adding in this "miscellaneous to balance" number every month. They have to figure out where the discrepancy is and then deal with it.

In theory they should make an adjustment to the Q1 totals and by increasing demand by 1.2 mbpd to solve their problem. In simple terms if they need to account for 93 mbpd in production and inventories are rising only 800,000 bpd then even a 4th grader could determine that demand must be 92.2 mbpd instead of the 91.0 mbpd they are claiming.

Historically the missing barrels have come from the IEA underestimating demand. When they post Q2 numbers they typically revise Q1 numbers by raising demand estimates. While nothing actually changed in the real world there will be the appearance of change when they say that demand forecasts rose by XXX barrels. Essentially all they are doing is adjusting the old numbers to fit reality rather than their supply/demand models.

If the IEA were to raise demand estimates by 1.2 mbpd it would slash the production surplus numbers by more than 50% to only 800,000 bpd. Instead of having a 2.0 mbpd surplus it would drop to only 800,000 bpd and the implications would be significant in the current market. Crude prices would spike immediately because everyone knows demand is still increasing because of the low prices. Analysts would project future shortfalls based on the assumed growth in demand of 1.5 mbpd that analysts are currently using. The impact to prices would be immediate.

Personally I doubt the IEA would do it all at once. It would damage their credibility. I suspect they will spread out any corrections to their model over several quarters to avoid rocking the market. Oil prices have gone dormant at $60 over the last month because of the expected accounting for the missing barrels and the normal decline in prices after the July 4th holiday.

Active Rigs

Active drilling rigs declined -2 to 857 for the week ended on Friday. This was the 28th consecutive week of declines. Oil rigs declined -4 for the week to 631. Active gas rigs rose+2 to 223. Active rigs have now declined -1,074 since the high of 1,931 in September. That is a -60% drop. Active offshore rigs fell -2 to 27 and -32 off their peak.

Oil Inventories

Crude inventories declined -2.7 million barrels to 467.9 million.

Refinery utilization fell from 94.6% last week to 93.1%. Imports rose +444,000 bpd. U.S. production declined -21,000 barrels to 9.589 mbpd.

Cushing inventories rose slightly to 58.1 million.

Gasoline inventories rose +500,000 barrels to 217.8 million. Gasoline demand fell by -424,000 bpd and imports rose +16,000 bpd.

Distillate inventories rose +100,000 barrels to 133.6 million. Demand rose +2,000 bpd. Imports fell -34,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.

Jim Brown

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