ND Oil Well Completions

Here is an update showing the latest reported well completions in North Dakota.  As you can see it has a 2 month lag, with the latest reports showing only 26 completions in ND during November while WTI was in the mid $40s with a peak over $48.  How many completions do you think were done in December and January?  Some that I have spoken to with working connections to ND oil fields have said fracking is now nearly completely shutdown.

What Bullish Data Did the Trading Bots See in Today's EIA Weekly Crude Report that You Didn't See?

What did the WTI crude oil trading bots/computers see in today's weekly EIA report that kicked off an immediate, powerful and sustained buy response?  Especially considering that the day was led by a Tuesday API report showing 11.4MM bbl crude build and the EIA report came in relatively close with a 8.38MM bbl crude build.  Both numbers far exceed the published analyst consensus of 3.5MM bbl.

The number one item is yesterdays bullish move in the broader markets was considered a follow through day on a rally attempt by many.  This moved the general market condition from correction to confirmed uptrend for those traders.  This means those traders are looking for a reason to buy, not reasons to sell.  The possibility of some OPEC and non-OPEC producers cooperating on cuts doesn't hurt the bulls either.  So let's look at bullish characteristics of the EIA report and characteristics that may cast doubt on the prevailing bearish crude oil story.

1)   Total stocks of crude oil + petroleum products unexpectedly dropped by 1.05MM bbl for the week.  While crude built, this meant refined inventory dropped by 9.5MM bbl for the week which is historically among some of the largest one week drops in refined inventory.  This adds weakness to the lack of demand case for petroleum products.  Refineries burning propane to crack other oils like bitumen and asphalt is leading to a big drop in refined inventory while supporting a build in crude.  This will continue if the US can export light crude and import heavy crude.  i.e. The trading bots aren't fooled by refiners burning through other oils to run their operations instead of crude.  These bots also know that as refiners move into summer mode, they will again be building other oil inventories putting a much heavier draw on crude.


2)  Petroleum products supplied spiked to 21.1MM bbl/day after a big surge the previous week.  This  nearly wipes out the big dip in petroleum supplied in the last week of 2015 and first week of 2016.  It also brings the 10 week average for petroleum supplied up to 19.8MM bbl/day which is above the 1 year average of 19.7MM bbl/day.  Back to back 20MM bbl/day and 21MM bbl/day weeks is very huge, especially given a prevailing idea that demand is just terrible.

3)  Refinery utilization dropped for seasonal maintenance.  On the surface it seems bearish and weeks ago it was as the market front runs this fact.  However, when maintenance hits it actually has a bit of a bullish characteristic.  Since the refining process has a gain of appx. 15% associated with it, more barrels of refined products are produced than barrels of crude used.  If  refiners slowdown by 1MM bbl/day during maintenance, refined inventories will actually drop 1.15 MM bbl/day just due to the maintenance slowdown.  So if you watch total inventory of crude + petroleum products it will fall quicker when refineries are slowing than if everything were to remain constant.  This is magnified since gasoline and distillate inventories are watched closely by most, but the remaining refined product classifications are widely ignored.

4)  Cushing inventory was down 770k bbl.  Overall Midwest inventory was down 1.29MM bbl in 2 weeks.  Many follow Cushing inventory as a leading indicator of US production.  I can't be the only one casting serious doubt on the EIA estimates that show US production maintaining--remaining resilient--in the face of lower prices given well completion rates in Texas and ND have fallen off the map in recent months while shale wells decline 5%/month, 65%/year.  We know new wells are needed to replace output losses due to the natural decline.  Since Dec. 4 Unaccounted for Oil has been repeatedly and abnormally negative in a big way.

I believe EIA will soon be updating their production model, either the the first week of February--next week-- or the first week of March, and then US production estimates will fall off at an extreme rate, 2-3%/month, just as they did during the summer of 2015.

5) While Canadian imports spiked in December and early January they have now fallen 10% in 2 weeks, about 2MM bbl/week off peak.  Given that we now know Canadian tar sands operations are now running at operating losses, and there is talk of many tar sands producers pulling in maintenance soon while this years maintenance season will be longer and heavier than 2015, this may be the beginning of Canadian imports dropping by 3-4MM bbl/week from current levels and staying there for an extended period until WTI reaches about $46.

My 2016 US Oil Production Projections

psw01 2016-1-13

I believe EIA just projected that US production would drop about 500k bbl/day in 2016 and average about 8.7MM bbl/day.  In my opinion that estimate is very high unless of course EIA expects a huge upturn in price soon.

I use Production + Unaccounted to get a truer picture of US production on a weekly basis.  The above chart plots US Production + Unaccounted for Oil over the last several years.  I added a couple of channels indicating where production is likely to actually go in 2016.  The bottom/steeper channel has a bottom trendline that assumes no well completions and therefore a 65% decline for shale.  I expect this to be nearly the case should price remain below $40 and certainly near $30.  The upper trendline in the steeper channel may be a more accurate representation of what will happen should WTI stay under $40  The upper less steep channel represents what is likely to occur should WTI only recover into the low $40s in a few months and stay there.

My expectation is that WTI will stay trapped below $40 into the March/April time frame with a recovery into the $60s or even $70s this summer.  However, production likely will not recover in any significant way till well into summer.  So we are likely to see US production fall well below 8 MM bbl/day in 2016 possibly as low as 7.5MM bbl/day.  We could see that much drop by May.  Without a major recovery in price to about $60, US production is likely to move sideways from there.

The above chart pretty clearly shows the start of a major US production cut.  To go along with just how severe it is I include this bit of data.  Over the last couple of years US combined inventory of crude+refined products grew by about 2.8MM bbl/week or 387k bbl/day.  Unaccounted for Oil on the weekly EIA report has been negative 4 of the last 6 weeks since the week of Dec 4.  The last 2 weeks have both been negative averaging -398k bbl/day which exceeds the average daily inventory increase for the last 2 years.  The 4 and 6 week averages for unaccounted for oil have been about -176k bbl/day.  For me it is pretty clear US production has rolled into a mode where it is not contributing to inventory growth, it is yet to be seen if imports will continue to overwhelm these cuts.

I do not believe that imports will overwhelm US production cuts leading to a continued inventory build.  There are two reasons, 1) I believe when these cuts and the rate of these cuts become apparent to the market in the coming 3-8 weeks, futures spreads will be cut either eliminating contango or shrinking it to the point where buying and storing oil is not very attractive.  2)  When these cuts become apparent the Saudis and the rest of OPEC will be  inclined to slow down production or at least maintain rather than grow once they see the US is no longer growing its market share.  After all of OPEC needs far more revenue and one of the easiest ways to get it is to allow price to rise.  3)  After the beating US producers just took with low prices, few will want to or even have the financial and/or manpower resources left to get in the way of rising prices by rapidly increasing production again.  Where US producers were once willing to maintain production around $48/bbl they will now wait for $55-$60.  In 2015 US producers were willing to increase production around $60, going forward they may wait for WTI to hold above $65 or $70.

EIA Overestimates US Production, Huge Production Drop in the Works #2

This is a follow on to EIA overestimates production

The error in EIA estimates for US production continues to build in a dramatic fashion as told by Unaccounted for Oil.  Unaccounted for Oil amounted to -459k bbl/day or -3.2MM bbl for the week of 1-8-2016.  Unaccounted for Oil has been very negative for 4 weeks out of the last 6 weeks.  The chart above makes it quite clear this is unprecedented at least going back to 2014, and in fact research going back further finds virtually no other occurrences like this one.  Also Unaccounted for Oil is now negative in back to back weeks which is also uncommon.

Again this points to how busted and inaccurate the EIA model is for estimating oil production in the US.  For now few see this or realize what it means as the EIA weekly production estimate continues to rise.  But how can this data be trusted when EIA almost weekly can't explain where the equivalent of 4500 rail cars or 1 or 2 tankers of oil went or possibly never existed.

However, there are some signs showing today that the more sophisticated traders understand.  Futures spreads are showing a major contraction today.  Some may look at the dramatic fall in later dated futures while near dated futures are holding steady as a bearish sign.  However, this is not true.  It means traders see less possibility of a crude glut in coming months and are unwilling to lock in profits for anyone willing to buy and store oil.  The futures spread began to narrow significantly overnight after API reported an inventory draw, and the contraction has maintained even after a bearish EIA report was released.  Going forward we should see a lot less oil being imported since the drop in futures spreads limits or no longer guarantees profits for storage players.

Note:  Even though continued negative unaccounted for oil values should be a bullish indication for oil prices there is a very significant bearish indicator that few are talking about.  Canadian imports to the US have been surging.  In fact this week was a record at over 3.45MM bbl/day and have been surging since summer.  Historically Canadian imports surge through the winter and early spring, but drop off significantly in the summer, so a rise from summer levels isn't totally unexpected, but such a large surge with such low prices is.  Of course Canadian producers could have heavily hedged their production this summer or in September effectively allowing them to sell at prices much higher than current spot prices.

Contrarian Indicator for WTI Crude--Managed Money Positions

If you want a contrarian indicator for where WTI crude price is going just look at the positioning of managed money, especially the bears--the short traders.  The main stream financial media loves to talk about hedge fund positions on WTI crude, especially during a down swing.  But if you have followed the crude market in 2015 closely, you will have discovered that shortly after the media is telling us that the hedge funds are shorter than they have been in a long time, crude reverses higher.

For the purpose of this post I'm defining bulls and bears as speculative bulls and speculative bears that invest via managed money.

Part of this is related to the fact that what is being stated as hedge fund positioning is really managed money in Commodity Futures Tradind Commision (CFTC) terms which also includes money in ETFs or ETNs such as DNO, USO, DWTI and UWTI.  Stating this is the position of the hedge funds makes it sound like all the money is under professional direction by a hedged fund manager that might have inside information, when the majority could actually be just your average person who decide to either buy some oil or short some oil since they just heard it is moving one direction or the other.

The data shows just how poor of an indicator managed money is, but it is a pretty good contrarian indicator.  Most traders and investors say the little guy is always wrong and CFTC data tends to confirm that.

Let's look at this chart in more detail and discuss some of 2015 price movements.

Spring Surge
Notice that price bottomed around the week of  3/17 but bears kept adding to their short positions--not by much, but a little--the following week of 3/24 while the weekly Tuesday price surged from $43.11 to $48.38.  Then the bears slowly rolled out of their short positions until price topped out and plateaued over $60 during the summer.  You will also notice about 70,000 short contracts were added during the Feb-March collapse from about $53 to $43 but the same 70,000 short contracts were closed as price rose back up to about $54.  The group that sold the last 70,000 short contracts likely made little or nothing and likely lost money.

Summer Collapse
Notice how the bears really didn't get involved until crude dropped below about $50-$52.  Isn't it strange that these bears were very excited to short oil at a low price as it dropped from $53-$43 but were not confident to build up a short positions during the summer when price was much higher, in the high $50 to $60 range  Only after price started to really break down did the bears come back out.  Short positions went up about 30,000 during the first drop from around $58 to $52, but 60,000 short contracts were added during the remainder of the move from $52 to just under $40.

Late August/September Surge
Notice again how the bears ended up closing up short positions as crude rose in late August and September and really failed to reestablish new short positions near the Sept/October highs, only really adding to short positions again as crude fell.

November/December/January Collapse
Shorts again have added over 30,000 short contracts to the already robust 150,000 short position as crude moved down in late November and December.  Given last weeks action and the chart history, it is very likely bears added a lot more short contracts this past week.  We have yet to find out how this truly ends up for them.  But if history repeats it won't end well.

It is interesting to note that the bulls smartly dropped about 60k-70k of contracts during the summer early summer highs.  However, it is also obvious that bulls are no better at building long positions when price is low than the bears are at building short positions when the price is high.  I've studied CFTC data going back to about 2006 and managed money was a good contrarian indicator when crude bottomed out in 2009 as well.

There is are a couple of other speculative bull/bear groups, they are the Other Reportables and Non-Reports in CFTC terms.  These groups trade futures directly and seem to do a better job of positioning ahead of large price swings rather than jumping in after the move has begun missing out on large gains.  I'll post more details about these groups later.