A spotlight has landed on a previously overlooked metric as oil traders drill deeper for clues on price movement.
A spotlight has landed on a previously overlooked metric as oil traders drill deeper for clues on price movement.
More often, investors are looking to weekly U.S. oil-production data from the U.S. Energy Information Administration for signs the global glut of crude that sunk prices last year is starting to shrink.
That data point, however, has some significant, well-known limitations, and some analysts say traders are giving too much credence to it.
The EIA’s weekly production data are largely based on a forecasting model, not reported output. And the week-to-week changes are often too small to be a reliable indicator of whether production is rising or falling, according to the EIA.
Still, on April 1, when the EIA report showed the first weekly production decline since January, the U.S. oil price surged by 5.2% to settle above $50 a barrel, even though the same report showed domestic crude supplies at a record high. Similarly, a small weekly production decline reported April 15 sent prices up 5.8% for the day.
Traders “only want to focus narrowly on the U.S. production data,” said Tim Evans,energy-futures specialist at Citi Futures, a unit of Citigroup Inc. “They’re basically intent on examining the bark on a tree rather than taking in the entire forest.”
Many market participants were taken by surprise when oil prices plunged last year, and a number of traders were similarly caught off-guard by the market’s rebound in recent weeks. So, amid a dearth of real-time data on world-wide oil supplies and demand, investors are watching granular U.S. statistics, from the weekly production figures to the number of rigs in action to estimated changes in drilling efficiency.
One reason traders have focused on the weekly production numbers is that the weekly count of rigs drilling for oil in the U.S. started dropping sharply earlier in the year, raising expectations that production would subsequently decline.
But globally, the oil market remains oversupplied, leading some analysts and investors to predict an end to the recent rally. Even as weekly data show a drop in U.S. oil output since March, production from the Organization of the Petroleum Exporting Countries has grown.
“Maybe the last $5 [in price gains] were just a speculative rally” based on U.S. production expectations, said Daniel Bathe, a commodities portfolio manager at Lupus alpha Asset Management AG. If U.S. oil rises above $60 a barrel in the coming weeks, Mr. Bathe plans to bet that U.S. oil prices will fall.
The weekly EIA number is derived from reported Alaskan output and a forecasting model for the lower 48 states. The EIA also gathers production data from state agencies for its monthly reports, which are released on a two-month lag and are considered more authoritative.
The weekly estimate is usually accurate within 100,000 barrels a day, or roughly 1% of total production, said Robert Merriam, manager of petroleum supply statistics for the EIA. However, the biggest production decline reported in recent weeks was only 36,000 barrels a day—meaning that given the margin of error, production could have risen that week.
“It’s overblown to just focus in on a narrow piece” of data to drive prices, Mr. Merriam said. “You have to look at the whole crude [oil] picture.”
Oil trader Andrew Hall, chief executive of $3.5 billion hedge-fund firm Astenbeck Capital Management LLC, said in an investor letter dated May 1 that the EIA’s weekly production number is “essentially an artifice.” Mr. Hall, formerly of trading house Phibro Trading LLC and Citigroup Inc., is one of the leading traders in the oil market.
In general, investors say they don’t base their decisions on one week’s numbers, but they do look at the trends. U.S. crude output has fallen in four of the past seven weeks. Plus, they say that even limited data is better than nothing.
“I can’t imagine that it’s considerably off, like hundreds and hundreds of thousands of barrels [a day] off,” said Dominick Chirichella, analyst at the Energy Management Institute, who trades for his own account.
He concluded that “the trend is pointing slightly lower in domestic production.”
One consideration for traders is that the EIA’s final monthly figures can reflect differences from the weekly indicators. “The market is hanging its hat on the hope that these weekly figures’ decline supports higher prices,” said Andy Lipow, president of consulting firm Lipow Oil Associates. “But what we do see is, month in and month out, there are some significant offsets to the weekly production figures when the EIA publishes its final monthly figures.”
The EIA data are set to become more accurate, as the agency is starting to collect information on crude-oil production directly from companies rather than from state agencies. Though that data will be gathered monthly, it could better inform the weekly production estimates, Mr. Merriam of the EIA said.
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