By Barani Krishnan
Investing.com -- While the S&P 500 had its worst week of this year from some of the Fed’s harshest inflation rhetoric in months, oil still found a way to finish in neutral as longs dived deep to buy into a market that scraped three-week lows just two days earlier.
At the heart of the recovery was the unwavering faith of oil bulls that Chinese demand will return bigger than ever to the market with the largest crude importer having ditched all COVID controls. With the anniversary of the Ukraine invasion dawning upon us, many admirers of Vladimir Putin were also cheering him on in oil trading forums to make life harder for energy-consuming countries with even deeper Russian production cuts than those speculated in a Reuters story this week.
One would imagine that the long side of the crude trade would be happy with the week’s outcome given what the alternative could have been - the dollar was at a seven-week peak and two-year Treasuries hit their highest since 2007.
Yet, after-hours bar talk on Friday, at least the one I was privy to with several hedge fund people, suggested a growing suspicion among longs that the EIA, or Energy Information Administration, was out to screw them by deliberately overestimating crude stockpiles week after week.
At stake was a build of roughly 60 million barrels in crude reported by the EIA since the start of the year, along with the caveat of so-called adjustments stated in each weekly report to reflect what the agency figured had gone missing to correctly reflect balances after all forms of supply and demand.
This latest Weekly Petroleum Status Report particularly kicked up a storm after the EIA stated in line 13 an adjustment of 2.097 million barrels per day that if calculated over seven working days would amount to 14.511 million barrels. The prior week, it was 13.8 million barrels.
Phil Flynn, an analyst at Chicago’s Price Futures Group and a self-proclaimed oil bull, took up the argument in his Friday note, saying “these adjustments are way out of whack with historical norms”.
To make his point, Flynn used the EIA’s own reference that typically an adjustment was supposed to be less than 2% of refinery crude oil inputs. The inputs for the week ended Feb. 17 were at 15 million barrels, meaning a 2% adjustment should have been around 300,000 barrels at most. The 14.511 million barrels the EIA reported as an adjustment was closer to a 14.5% adjustment, Flynn argued.
He signed off with a further lament that, regardless of the fact of the matter, “the EIA tells us that based off that adjustment, U.S. commercial crude oil inventories are about 9% above the five-year average for this time of year.”
What perhaps was missed by many was the tweet by EIA Administrator Joe DeCarolis on Friday that addressed the controversy. In fact, DeCarolis had issued a similar tweet in November, just as discrepancies between supply and demand had prompted the EIA to make larger weekly adjustments.
In his latest tweet, DeCarolis said: “We've had two weeks in a row with large crude oil adjustments indicating undersupply: 2 million bbl/d both weeks.” He added: “Remember: weekly numbers are highly variable; better to focus on the WPSR 4-week average or PSM. We'll be releasing the findings of our 90-day study very soon.”
And what does the 4-week average for the latest full month - January - say?
In the Monthly Energy Review, under “stocks”, the EIA has a “preliminary” estimate of 1.61M barrels - virtually matching the 1.6072M reported for the week ended Jan. 27.
In a foreword to the numbers, the EIA says: “These data are usually preliminary (and sometimes estimated or forecasted) and likely to be revised the following month.”
The variance resulting from adjustments, after all supply and demand are accounted for, is usually negligible.
Aside from the foreword of the energy review, the EIA does alert readers in the footnotes of the actual data itself that the numbers may not add up right away, though they do eventually. “Stocks are at end of period. Totals may not equal sum of components due to independent rounding.”
The crude oil adjustment is perhaps the most frequently misunderstood component of the EIA’s work.
Key weekly crude oil quantities are linked through the following balance relationship: Domestic Production + Imports = Refinery Inputs + Exports + Stock Change.
The stock change - the takeaway for traders in each week’s data that can decide millions of dollars in position wins or losses - is basically the difference between total stock builds and stock draws.
There is actually nothing really mysterious about the weekly adjustments made by the EIA as all the information is easily searchable online, with the agency even having published a blog or two over the years to help people better understand these.
Also, in comments carried by MarketWatch this week, the EIA’s DeCarolis said in a direct response to the controversy:
“Ideally, the adjustment would be zero since the crude oil supplied has to go somewhere, but there is a degree of uncertainty associated with each term, stemming from imprecise statistical sampling and modeling inaccuracies."
My question for the naysayers of the government data is: How different has the weekly supply-demand reporting by the API, or the American Petroleum Institute, been?
The API, as traders know, works on numbers reported voluntarily by members of the industry. As such, the information it issues the night prior to an EIA release can never be as comprehensive. Yet, as a custodian of the industry, one would, in theory, imagine the API to be “fairer” to those seeking higher prices. And what did the API report for last week? 10M barrels versus the 7.7M reported by the EIA.
I can understand the consternation of oil bulls if the API had reported a 10M draw for last week versus the 7.7M build cited by the EIA. But no, what the industry group had was 10M back-to-back for two weeks. Added up, that’s 20M versus the two-week tally of around 24M on the government’s side. There is a variance - one that will be worked out when all the data is in - but it’s not miles apart as oil bulls think or contend.
John Kilduff, founding partner at New York energy hedge fund Again Capital, has this to say for those who still feel done over by the EIA’s adjustments:
“These variances have hurt those on the short side of oil too. The difference though is you don’t hear them complaining about it, at least not as much as the longs do. At the end of the day, these numbers are real and they are what the whole world refers to as U.S. oil data. If you still feel otherwise, remember: You can’t fight City Hall.”
Oil: Market Settlements and Activity
New York-traded West Texas Intermediate, or WTI, crude for April delivery did a final trade of $76.45 on Friday, after settling the official session at $76.32 per barrel - up 93 cents, or 1.2%, on the day.
Earlier in the session, WTI fell as much as $1.28. But after the turnaround, the U.S. crude benchmark finished the week down just 2 cents, practically flat.
Brent for April delivery did a final trade of $83.23 on Friday, after settling the official session at $83.16 per barrel - up 96 cents, or 1.2%, on the day.
Brent fell as much as $1.12 earlier in the session. For the week, the global crude benchmark finished up 13 cents, or nearly flat too.
Oil: Price Outlook
WTI is at an inflection point after a narrow $4-trading range through the week with just two days of loss aversion at the end, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“The upside remains capped at $78 initially, above which the weekly Middle Bollinger Band of $80.15 looks like the next challenge,” said Dixit. “Strong acceptance above $80.20 will be seen as an endorsement for the major resistance zone at the 100-week SMA (Simple Moving Average) of $83.90 and the 50-week EMA (Exponential Moving Average) of $84.70.”
Failure to make a sustainable break above $80.20 will cause fresh weakness, prompting a quick drop to the recent low of under $74, he said. “WTI looks vulnerable to the ascending trend line support at $72.20,” Dixit added.
Natural gas: Market Settlements and Activity
The most-active April gas contract on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.726 per mmBtu, or metric million British thermal units, on Friday. It earlier settled the official session at $2.4510 — up 1.9 cents, or 0.8%. That gain was in addition to the previous day’s 5.8% rise that added a little more insulation for the contract from a retest of the $2 support that would open the trapdoor for its plunge again into $1 territory.
For the week, Henry Hub’s most-active gas contract rose 4.3%, marking only the second positive week in 10 for futures of the heating oil. March, the front-month contract on the hub, expired at Friday’s close, settling at $2. March gas fell to a 2-½-year low of $1.967 on Thursday.
The higher close of the past two sessions came after the Energy Information Administration reported that U.S. utilities pulled 71 bcf, or billion cubic feet, from U.S. natural gas storage during the week ended Feb. 17 for power generation and heating. That draw was just slightly above the 67-bcf consumption expected by industry analysts for last week. It also paled when compared to the 100-bcf usage from the prior week to Feb. 10. Yet, it seemed enough for now to keep gas anchored at mid-$2 levels.
Natural gas: Price Outlook
Natural gas’s price action over the past week indicates consolidation above the $2 support and the possibility of some bounce towards $2.78 “on a conservative perspective”, said Dixit of SKCharting.
“On an immediate basis, the 4-hour chart, the RSI (Relative Strength Index) at 71 and the Stochastics at 99/95 all are giving signs of exhaustion at the lower end,” he said.
“For the short term, $2.33 is the support. If this is broken, it can push prices down towards $2.15.”
Resistance shifts to $2.68-$2.78 may be tested if the price action is supported by demand above the daily Middle Bollinger Band of $2.48, Dixit said.
“If the short-term rebound proves real above $2.78, we may be looking for the next leg higher of $3.5, which would really require strong energy among gas bulls.”
Gold: Market Settlements and Activity
Gold for April delivery on New York’s Comex did a final trade of $1,818 an ounce after officially settling Friday’s trading at $1,817.10, down $9.70, or 0.5%.
For the week, the benchmark gold futures contract lost $23.30, or 1.3%.
The spot price of gold, more closely followed than futures by some traders, settled at $1,811.60, down $10.71, or 0.6% on the day.
At the heart of the gold trade is the sinking feeling that the metal might be consumed by the same inflation it is supposed to be a hedge against, as the Federal Reserve gears to ratchet up rate hikes again amid stickier-than-thought price growth.
The latest trouble to gold came in the form of the Fed’s preferred inflation indicator - the Personal Consumption Expenditures, or PCE, Index - which grew 5.4% in the year to January, beating forecasts for the month as well as its previous growth in December.
The dollar hit a seven-week high against a basket of major currencies while the yields on the 2-year U.S. note hit their highest since 2007 amid a near reach of the 4% level for the benchmark 10-Year note.
All these were on the back of expectations that the Fed will resort to more hawkish monetary action amid the “hotter inflation in the U.S.”, economist Greg Michalowski said in a post on the ForexLive forum.
U.S. consumer sentiment, meanwhile, hit a 13-month high in February, according to a survey by the University of Michigan that showed Americans more optimistic about spending at a time the Fed actually needs them to show restraint.
Gold: Price Outlook
With the dollar back on a ramp-up, the spot price of gold looks set to advance on declines, said SKCharting’s Dixit.
“Going further, the 100-week SMA of $1,808.80 which stopped the decline of gold may be challenged further by gold bears trying to dig in a bit deeper into the 50-week EMA of $1,803, followed by the weekly Middle Bollinger Band of $1,796 and the 100 Day SMA of $1,792.”
Dixit said if selling intensifies below $1,800, gold is likely to witness a breaking through below the $1,796-$1,792 support areas and reach the $1,788 critical support.
It could even test the 200-Day SMA of $1,775 before resuming an uptrend, he said.
“As gold’s daily RSI has already reached 31, any further sell off below $1,800 or a drop to $1,788-$1,775 will push the daily RSI to extreme oversold conditions, calling for an imminent rebound to retest the broken-support-turned-resistance zone of $1,828.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.