Ever since the talk about global oil glut has gotten louder, I have been trying real hard to find out the factors responsible for this. The recent stories published and aired suggest that OPEC, led by Saudi Arabia, is responsible for the steep fall in prices. The price per barrel has plunged to US$35 from its peak of US$147. A question came to my mind, is Saudi Arabia the only culprit?
Having spent weeks on finding a plausible reason, I reached a very disturbing point. My conclusion is that the stories being published and aired are based on a few premises, which are incorrect and misleading. The biggest factor that moves oil price is weekly US stockpile data released by the US Energy Information Administration (EIA). In the recent weeks it has reported a sudden rise and fall in US stockpiles, which resulted in high volatility in crude prices. Most of these spikes were reported at a time when the world was following the OPEC-led effort to contain glut.
Today, I read shocking news that millions of barrels of oil produced in US remain unaccounted for. This raised a question, is EIA reporting correct data about US oil stockpiles? Ideally one should trust that EIA is not providing misleading information. However, keep the track record of US intelligence agencies in mind, one has a reason to question the sanctity of the data disseminated by EIA.
The data released by EIA about crude oil inventories influences its price. If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices. The same can be said if a decline in inventories is less than expected. If the increase in crude is less than expected, it implies greater demand and is bullish for crude prices. The same can be said if a decline in inventories is more than expected.
Another reason for doubting the data is little disclosure about shale oil production. The number of operating rigs reported by some service is still less than 500, as against an installed number of more than 1,900 touched in 2014. This suggests that around one-fourth of installed rigs are operating for almost three years. What has the fate been of remaining three-fourths? How many of them have filed bankruptcy under Chapter 11? If no such report has made public, one can very conveniently doubt the authenticity of EIA data.