The Fuse

Production Outlook, Timely Data in Flux in Rapidly Changing U.S. Crude Oil Landscape

by Matt Piotrowski | September 10, 2015

The Energy Information Administration (EIA) has downwardly revised its U.S. crude oil production forecast for next year once again, the latest indicator of how low oil prices have affected high-cost shale output. The forecast revisions continue to add to uncertainty and price volatility, given that the outlook for U.S. production is a key wild card for global oil markets. The EIA’s latest revision continues the trend of downward adjustments begun at the start of the year: The outlook keeps getting grimmer for U.S. producers amid continued weakness in prices, lower capital expenditures, and missed hedging opportunities, among other issues.

Despite the unreliable nature of some of the EIA’s data sets, the projections are widely used by the agency for its model in determining U.S. production numbers in its weekly reports, which are closely eyed by traders to gauge market fundamentals and price direction.

However, despite the unreliable nature of some of the EIA’s data sets, the projections are widely used by the agency for its model in determining U.S. production numbers in its weekly reports, which are closely eyed by traders to gauge market fundamentals and price direction.

In its latest Short-Term Energy Outlook (STEO), the government agency pegs U.S. production for 2016 at 8.82 mbd, down .14 mbd from last month’s forecast. This downward revision comes on top of a much larger adjustment of .36 mbd in August. Since the beginning of the year, the EIA has sliced its U.S. production outlook for 2016 by a total of .71 mbd (see graphic below). The revisions for the 2015 average have not been as dramatic, falling by .09 mbd from January to 9.22 mbd in the latest STEO.

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Data Discrepancies: Weekly vs. Monthly Production Numbers

The STEO’s forecasts are not just important for projecting future supply. They are also a key determinant for preliminary production figures in the Weekly Petroleum Status Report (WPSR), which is the most timely data put out by the agency and analyzed by oil traders and others to determine the outlook for fundamentals and prices.

Initial weekly numbers, closely eyed by the market ever since U.S. crude oil production started to significantly impact prices, are fraught with uncertainty. These preliminary estimates usually diverge from data in the EIA’s Petroleum Supply Monthly (PSM), a detailed data report that uses a different methodology than the WPSR and is considered more comprehensive. In other words, the EIA is using two different models to estimate production numbers, one for the weekly reports and one for the monthly reports.

The EIA is using two different models to estimate production numbers, one for the weekly reports and one for the monthly reports. Revised data in the PSM often paints a very different supply picture a couple of months after the weekly numbers are released.

Revised data in the PSM often paints a very different supply picture a couple of months after the weekly numbers are released. For instance, preliminary data said U.S. crude oil output for June averaged 9.6 mbd, but the PSM estimated production for the month at 9.3 mbd. U.S. output was declining from its peak in April. But before the new data came out in the PSM, weekly numbers showed that production was continuing to rise. In fact, the complete opposite was happening.

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Given the differences in methodology and the weekly numbers’ reliance on forecasts, continued divergence in crude output averages between preliminary and revised data is expected. The weekly and monthly data are based on two different estimation methods, with the EIA using the best available information for its analysis at time of publication for the WPSR and the PSM. EIA’s methodology for developing the weekly estimate is driven in large part by the STEO forecasts, which are typically off-target (see above), while PSM data, recently expanded, is based on figures coming directly from operators in 15 states. Before the latest PSM, published in late August with a revised methodology, the monthly numbers came from drilling data and state-level production data, which tended to be incomplete at the time the PSM was published—but still more comprehensive than the WPSR. The EIA sees the new method as providing more accurate assessments given that the information is coming directly from the producers themselves.

The U.S. government has the most visible and timely energy data in the world, but it is still incomplete.

“Most of the uncertainty in the weekly estimate is associated with the STEO forecast for lower 48 and GOM production,” the EIA says in an appendix for the WPSR entitled “Explanatory Notes and Detailed Methods Report.” “For example, when lower 48 crude oil production is either increasing or decreasing rapidly, the accuracy of the estimate for any particular month is likely to be reduced.”

The U.S. government has the most visible and timely energy data in the world, but it is still incomplete with the full supply-demand balance not emerging until months after the fact. Nonetheless, oil traders, who are hungry for real-time intelligence in a market clouded in uncertainty, will still digest the preliminary weekly numbers and use them as guidance, no matter how inadequate they may be.

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