Oil prices stuttered earlier in the week on concerns about the Chinese economy. Yet, the latest data shows that China is importing a lot of oil and showing no signs of slowing down. China’s crude oil imports rose to 37.04 million tons in November, or 9.01 million barrels per day (bpd), the second highest on record, data from the General Administration of Customs showed on Friday, according to Reuters.
The demand side of the equation is what many people forgot to think about when they kept taking glut like that was somehow permanent. Yet, demand in China and above average growth in both developed and emerging markets has helped draw down global oil inventories. While OPEC is looking for a balanced market in their Third Quarter of last year, the evidence that we are seeing in declining oil inventories is that it is happening right now.
The Energy Information Administration (EIA) latest report on U.S. oil production hit 9.71 million barrels a day, the highest level in weekly data compiled by the EIA since 1983. But considering recent admissions by the EIA about their methods and how they may be overstating U.S. production levels may be the reason the market is skeptical. Remember a study by MIT showed what they say is a critical flaw in the way the EIA forecast production numbers that leads them to vastly overstate U.S. oil production numbers.
The study pointed out something we pointed out in our “Peak Shale” report that the EIA was assuming that productivity of individual wells will continue to rise because of improvements in technology or as the report said that they assumed that the oil production would compound year after year, like interest. So, the EIA would look at rising rig counts and assume that would mean more oil. Yet, because of that incorrect assumption, they kept raising production when in reality because of less production per well and the sweet spot where they have been drilled would cause less, not more oil per well.
The EIA did not dispute this and said the study raises valid points. Yet the EIA is doing the best job they can with the tools they have to work with.
Yet, this production overestimation can cause some real problems for the shale industry and the average American. I warned about this earlier this year on Mornings with Maria on the Fox Business Network long before anyone was talking about it. That is why you need to watch Fox Business. Many folks had shale stars in their eyes but failed to account for the declining shale production rates as shale producers moved from their sweet spots and the profitability of shale was increasing but in question.
Later, Harold Hamm, of Continental Resources told FOX Business’s, told Maria Bartiromo that the slight uptick in oil prices is due to small adjustments made in the Energy Information Administration’s (EIA) short-term energy outlook. “Recently with their September short-term energy outlook, they made an adjustment of 130,000 barrels down. It should have been about 500,000 barrels actually,” Hamm told Maria Bartiromo on Mornings with Maria.
Hamm said his estimates for oil production pales in comparison to the EIA’s. According to Fox Business said that “We are showing about 9.35 million barrels, 9.4 million barrels by the year’s end for the U.S. In comparison their prediction was 9.8-9.9, close to 10 million barrels,” he said. “If you look back when Nigeria and Libya brought on an extra 400,000 barrels, the price was hit some 20%, it went down $53 to $43, and we feel like that’s about the adjustment that’s due right now.”
That is a big deal. False perceptions about production can lead to inefficient investment and prices and could lead to shortages in the future. Hopefully, we can take the shale out of our eyes and give the market reality and not fantasy on U.S. shale. Natural gas as we expected had an increase in the supply of 2 bcf. Surging nat gas production and warm weather set the stage for the build.