October 26, 1998
Slippery Slope
Oil's rally built on suspect data
By Cheryl Strauss Einhorn
Key Commodity Indexes
Crude oil had a very volatile week. It began by dropping to its lowest level
in two months, just above $13 per barrel, but rallied strongly by Wednesday.
The reversal was caused, in part, by a seemingly bullish inventory report from
the American Petroleum Institute, which showed a surprising decrease in oil
stocks of almost 300,000 barrels. Friday, crude settled at $14.05.
But the API data are suspect for several reasons, and this presents a
short-term selling opportunity for traders.
First, analysts had expected a sharp buildup in crude inventories last week
because oil tankers, unable to dock in the Gulf of Mexico during September's
storms, have had safe passage lately.
Second, the Department of Energy, which also tracks oil inventories, released
its own data on Wednesday, showing that crude stocks had ballooned -- as
expected -- by 3.5 million barrels.
"Many people are scratching their heads about the strength of the market,
given the conflicting numbers," says Rich Redash at Prudential Securities.
"Even if you expected a bigger build than DOE showed -- meaning that
DOE's figures were supportive of higher prices -- it still isn't worth 80 cents to
the market," he says. "That's crazy. It is overdone. This is a selling
opportunity."
Indeed, examining how API and DOE collect their respective data supports
lower prices. The energy industry must, by law, submit data each week to the
DOE. That includes: refineries, blending plants, bulk terminal operators,
petroleum product pipeline companies, oil producers, and any others involved
in oil storage.
The DOE's Mike Conner, a survey statistician, says 97% of companies
actually report data monthly, while about 92% meet the weekly reporting
requirement.
The API is a private trade organization, by contrast, which companies pay a
fee to join. Although both members and non-members are asked to submit the
exact same weekly data to the API they send to the DOE, it's entirely
voluntary. Reports may only be partially filled out, or may not be returned at
all.
Too, API knows its data are incomplete. It figures that each month, about
90% of total oil volume is accounted for in its numbers. But compliance may
be lower in any one week and "we never know on a weekly basis what
percentage of companies are reporting to us," says Julie Harris, who compiles
the API numbers.
For the 10% of the industry volume that API suspects is missing from its data,
the trade group uses DOE figures compiled from monthly data over 15 years.
The greatest emphasis is put on the most recent month's DOE monthly report.
Result: The 10% figure, totaling 30 million barrels, must be wrong because it's
old.
"Everybody doesn't have to report to us," says Harris. "So we use DOE
monthly data to determine the difference between what we get and what
numbers they published in their prior month's report."
API revisions are random. It revises its data only if a company tells it to. And
API revises only its week-over-week data. "We never go back any further,"
says Harris. "It just depends if a company sends us a revision. We never
know if we'll get one."
When asked about how often the API and DOE reports diverge, both groups
said last week's event was unusual. "Usually the numbers move in the same
direction," says Harris.
The DOE's Conner concurs: "Usually API revises its numbers to come closer
to us." Just last week, the API did that, changing its October 9 numbers to
resemble DOE's. Had the API not revised, it, too, would have shown a
buildup in stocks -- although not as large a jump as the DOE's figures suggest.
The API would have noted a 500,000-barrel hike from October 9 to 16,
while the DOE had a 3.5 million barrel build for that period.
"This is a bigger divergence than usual," says Conner. "Ordinarily the
difference would be the size of the build in stocks, and not a draw versus a
build." Hence data shouldn't be looked at in a vacuum, but rather, over a
period of time -- say, the average of four weeks' worth.
"I suspect," says Conner, "that API didn't get -- or didn't handle -- some
questionable data like we did. A company reported a number we didn't
believe so we adjusted it by using that company's average data supplied over
a period of time."
Harris says if a company reports unusual data, API calls them. But when
asked if any data seemed suspect, she said there was nothing unusual about
last week's figures.
Still, it seems likely the API will revise its numbers, which would dampen
some of the market's current bullish sentiment. Too, fundamentals remain
bearish. Inventories remain high, not only of crude, but also products: gasoline
and heating oil. Imports are on the rise, attracted of late by our price runup.
OPEC is talking of not extending its production cuts. And the world economy
looks shaky. |
