CIO continues to advise investors with a high risk tolerance to sell Brent’s downside price risks or to add exposure to longer-dated Brent oil contracts. (UBS)

With mandatory surveys, the US Energy Information Administration tries to get a sense of real activity on the ground—but it takes about two months to release the data (other countries take even longer to release their data). The latest month with US oil data is November, and the report was released at the end of January. Those surveys also hold some degree of uncertainty.


Unfortunately, over the last few years, there was a rising mismatch between what surveys showed as being supplied (production and imports) and what surveys showed as being disposed (inputs into refineries to produce refined products, exports, and crude inventory changes). In a world with perfect data, the supply adjustment would be zero. But in the EIA’s data, it was positive over the last several years (production + imports + supply adjustment = refinery input [consumption of crude by refineries] + exports + crude inventory changes). Assuming good data for imports and exports, refinery input, and inventory changes, the reason for the positive supply adjustment likely was crude production being underestimated.


The EIA’s own study concluded that blending was the main factor, eventually resulting in too low crude production estimates and too high export estimates. Light hydrocarbons (e.g., gasoline) and unfinished oils that are blended into crude oil were counted as final demand, resulting in a too high crude disposition. This element was fixed last August, with a new element—transfer to crude oil supply—introduced in the monthly report.


And on the supply side, unreported field condensate blended into crude oil at natural gas plant processing facilities or producing region tank farms or pumped directly into pipelines that carry crude oil is missing from the data as well. Tackling this inconsistency takes time and requires a new survey. The EIA therefore plans to introduce a new element condensate and scrubber oil field production—in the report to be released at the end of March.


When including the transfer to crude oil supply element, which has data back to 2022, the supply adjustment number was mostly positive from 2018 to mid-2023. On average, it ranged from 315,000 barrels per day (bpd) to 430,000bpd from 2018 to 2022. Since August 2023, that number has come in constantly in negative territory, with the latest two values at –348,000bpd in October and –315,000bpd in November. Adding those negative numbers to the US crude production would still result in high production levels, but around 13mbpd in November instead of a record 13.308mbpd. US crude production growth in 2023 was solid even when including those changes, but a bit less strong than currently estimated by energy agencies if our assumptions are correct, as production in 2022 was higher and production in 2H23 lower.


In our recent report “ Missing barrels ,” published on 22 January, we highlighted a discrepancy between visible oil inventory dynamics in 4Q23 and what the supply and demand models of the International Energy Agency were implying. We await the March change to make a final call, but it is possible that a part of those missing barrels were not produced during 4Q23.


Factoring in too high US crude production figures in market balances might indicate a considerably better supplied oil market than the reality. If there is no stronger supply growth from other countries and oil demand growth does not surprise negatively, it could mean that the oil market is tighter than what many market participants perceive. This backdrop would make it easier for OPEC+ to steer the oil market. Lower US crude production in January due to weather-related disruptions and lower OPEC crude production also helped to tighten the oil market further in January, with visible crude inventories falling last month. Hence, we will also continue to focus on oil inventory changes as the indicator to assess market balances.


We continue to see the oil market as slightly undersupplied and look for Brent to move into a USD 80–90/bbl range over the coming months. Hence, we continue to advise investors with a high risk tolerance to sell Brent’s downside price risks or to add exposure to longer-dated Brent oil contracts.


Main contributors – Giovanni Staunovo, Wayne Gordon, Dominic Schnider


Read the original report : Crude oil: Is US crude production overestimated?, 7 February 2024.