RE oil26 May 2018 20:59
Oil markets can often move so much so fast that it's hard to get your handle on what's really going on.
For example, WTI is currently trading below $68/bbl today down more than $4/bbl since last week. The reason?
Saudi and Russia are in discussion of a potential to increase oil production by 1 million b/d IF there are more supplies lost from Venezuela and Iran.
But you won't read the "if there are more supplies lost from Venezuela and Iran" commentary from most of the headlines. No, you will just read the part talking about Saudi and Russia potentially increasing oil production by 1 million b/d. We won't even mention the fact that this is still in discussion, and the 1 million b/d number was just a figure thrown out of thin air to bait the journalists.
Nonetheless, the severe climb we've seen in energy equities and oil needed "a reason" to sell, and as we wrote in our OMD earlier in the week titled, "Oil - What To Look For Next?"
Overall, you will see weak hands sell into these headlines about the potential for OPEC to discard the production cut agreement, but if you understand our thesis (as detailed here), we do not think OPEC will exit the production cut agreement. The basic understanding here is that we do not believe this is a production cut, to begin with, but a mere pullback from max capacity.
So, are we concerned that Saudi and Russia are even contemplating increasing production by 1 million b/d?
No, and here's why.
There are several variables in the oil outlook that wasn't there at the end of 2017 when we did our price forecast.
1. Permian production bottleneck is worse than it appears.
Midland basin differential hit a high of -~18/bbl yesterday. This is likely manifesting itself into potential shut-ins over the summer if takeaway capacity lags the increase in production.
US oil production is a big growth engine for non-OPEC supply growth this year, so any setback will show stagnant production growth for at least a few months, which will translate into supplies lost and lower storage.
In addition, we have recently compiled data from Kpler to match the difference in actual exports versus EIA's stated US crude exports, and we find this staggering divergence:
What you see in the chart above is that EIA has massively overestimated US crude exports since April 20th. As a result, we have seen the overestimation of demand turn itself into a positive adjustment factor.
Now if you broke this into a table, this is what it looks like compared to adjustment factor:
If it is true that EIA has overestimated exports on average by 393k b/d since April 20, and the adjustment factor has only averaged +190k b/d, the 200k b/d difference could be explained by overstated supplies. (For discussion on adjustment factor, please see this write-up.) This then could go on to explain that EIA's weekly US oil production model of 10.7+ million b/d may be overstated.
How would we know
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