- October 14, 2017
- Posted by: Art Berman
- Category: Presentations & Publications
We check in with Art Berman on whether or not this is just the beginning of investor fatigue in the shale industry.
Enjoyed your thoughts.
Great interview Mr. Berman. Always a pleasure hearing & reading your work. Insightful.
Thank you for what you bring to the markets.
like Art Berman
love Art Berman
like to get some information on shale gas and oil
The following is my brief presentation. If you would like to have a more detailed version with a bit more explanation, please just email me and let me know. Now to the presentation:
I am a former senior financial executive of two vey large crude oil trading companies and two merchant refiners. I have financed many billions of dollars of physical domestic oil trades. As such, I know the operations of these transactions. Likewise, I have studied the detail of the EIA web site and I have communicated with them several times. In fact I was able to get them to change the way they communicated “biased” statements about oil in their weekly report.
My reason for writing to you is very simple – I am trying to let you and others know that the EIA is misleading the market about crude oil inventory levels and changes over the last few years. I have brought this to the attention of the EIA, and they agree with me. The problem – they will not advise the market of their practice. The market can’t know what they’re doing, it takes someone with my experience and willingness to get in the weeds of their reporting process to discover the consequences.
Actually, it is very simple. Refiners, like other manufacturers have two kinds of inventory. First they have inventory on hand, and second they have inventory in transit.
When the EIA counts foreign crude oil supply (particularly waterborne shipments that may take up to 45 days) in transit, they do not count it as in transit inventory. Foreign crude oil shipments are counted when they are unloaded at or very near refinery docks. So, for foreign supply, they only count inventory on hand. They call this Refinery Stocks and that is the number that is counted for foreign supply.
The other part of the refiners supply comes from domestic production. When it comes to domestic production, the EIA counts inventory on hand, and unlike foreign supply, it also counts inventory in transit. Without going into the mechanics now, domestic inventory in transit can easily take 45 days or more. So, when domestic production in transit to the refiner is counted, it is a very large number, several times larger than inventory on hand. Obviously, this is because the long transit time causes the same barrel to be counted in several weekly reports.
Over the last few years, the shale revolution caused domestic production to rise by about 4 million bopd. As this increase occurred, refiners switched from about 4 million barrels a day of foreign supply to the additional domestic production. Here is where the EIA “tricked” the market – unnententionally!
The EIA did not count the refiners’ foreign inventory in transit. But it did count their domestic inventory in transit. So, as the refiners switched from foreign supply to the increased domestic production as a replacement supply, the barrels counted as inventory in transit (in the switch) went from zero for the replaced foreign supply to 45 days of in transit inventory for the new domestic supply.
Just by switching the sourcing of the refiners’ supply from foreign to domestic over the last several years, EIA reported inventories increased from around 350 million barrels to around 500 million barrels. This happened even though the refiners’ operating inventory level didn’t increase at all. The only thing that changed was the increased domestic inventory in transit, while the UNCOUNTED foreign inventory in transit declined by a like amount.
As long as domestic production and inventories remain at these levels, U.S. Inventory levels, won’t go down, except for seasonal and weekly ups and downs. While the world waits for our “glut” inventories to fall, the EIA will not come out and announce their “trick” in counting inventory balances and the impact it had as inventories rose and now remain “high.” Ironically, the IEA is already starting to sound like they are going to be the first to recognize and report on the coming shortage of crude supply.