BARCLAYS: A lot of pros are getting these 5 things wrong about the oil industry
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Written by: Akin Oyedele
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In a note to clients on Wednesday, Michael Cohen, the head of energy commodities research, wrote that the central story of the oil market right now is misunderstood. That’s the market’s rebalancing, or a reduction in supply to come closer to demand levels, which would lift prices.
“Global supply and demand estimates are extremely prone to error and are frequently revised in both directions,” Cohen wrote.
“In addition to balance revisions, the fundamental components of the oil market balance are categorically misconstrued by many analysts and can drive short-term changes in oil market sentiment.”
Cohen listed these five ways that analysts misunderstand the oil market:
The weekly data on inventories from the Energy Information Administration may exaggerate consumption.
The EIA acknowledges that some of the data on stockpiles such as production may be imprecise. But the adjustment factor, which balances out the effect of the estimate, is getting larger. That means production is likely higher than the EIA initially states.
But then, futures markets move based on the first releases, not on later revisions.
OECD inventory levels are not as high as they seem.
Earnings calls are not an ideal indicator of US production levels.
Halliburton said the North American market has turned, and the rig count reached a “landing point” during the second quarter.
Focusing on these comments and others from the top 50 companies ignores the smaller players, some of which are expanding production.
There’s too much focus on the active Permian Basin in West Texas.
“The total US crude supply response will not resemble the supply response of the best positioned producers and the response from the best plays,” Cohen wrote.
Drilling in the Permian has remained robust even with low oil prices. The best companies there including Shell and Chevron are likely to continue outperforming, but it’s unclear what the hundreds of other companies will do.
There’s not enough focus on non-OPEC, non-American supply, which is three times the size of US output.
Production is falling in many of these countries.