Adjusted EIA Crude Oil Stocks Data Sets Stage for Bullish Surprise

08:45PM Oct 12, 2016
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The crude oil market could be in for a bullish shock on Thursday as EIA has announced it will no longer include lease stocks in their U.S. crude oil stocks tally. Last week, EIA reported 499.7 million barrels in storage, 31 million of which are considered lease stocks.

According to EIA's September 14 edition of This Week In Petroleum, "Starting with the Weekly Petroleum Status Report (WPSR) published on October 13, 2016, the U.S. total commercial crude oil inventory weekly data series will no longer include lease stocks. This change reflects our understanding that lease stocks are not yet available for commercial use and that in many cases operators do not count them as production until they are transferred off of the lease via pipeline, rail, or trucks to tank farms for storage.

Crude oil lease stocks, currently about 31 million barrels, refer to oil that is stored in tanks at sites across the United States where producers are drilling on leased land. Lease stocks have been relatively small and stable, ranging from just 30.6 million barrels (5.8%) to 33.1 million barrels (7.4%) from January 2014 through June 2016. Over that same period, total U.S. commercial crude oil stocks have increased from 367 million barrels to 529 million barrels, as rising U.S. crude oil production contributed to growing commercial crude oil inventories. As of the week ending September 9, the total U.S. commercial crude oil inventory was about 511 million barrels including about 31 million barrels of lease stocks."

Crude oil traders have moved to the long side of the market in the last week or so as rumors of an OPEC production freeze once again captured headlines. This time around, the rumors may have some teeth, but $52.00 has been a tough point of resistance for the November WTI contract. If rumors and headlines about a production freeze have been enough to spur short-covering rallies, a 31 million barrel perceived weekly stocks draw may have a similar impact. If traders are not keen to the fact that 31 million barrels will no longer be considered "stocks in storage", the result could be a rush higher in crude futures.

Those "in the know" may comprise many of the investors who have placed bullish bets on crude lately, speculating that the sharp decline in U.S. stocks will take others by surprise. A move above resistance at $52.00 could signal a test of the $60.00 area, but spec traders are not likely to leave profits on the table for long, and a round of profit taking could pressure WTI to a more fair value in the mid-$50's per barrel or below.

The revised dataset adds an element of upside risk to farm diesel prices. We have noted a seasonal tendency for farm diesel to soften after harvest demand has been exhausted. If WTI crude oil surges to test resistance around $60 and holds, the post-harvest diesel price decline could be very limited. It is important to note in all of this how sensitive the crude market has been to the rumormill and headlines. If trader sentiment fully runs its course, a buy the rally sell the fact reaction could end us up right back where we are today, hovering around $50 per barrel after a sharp increase on Thursday. In the meantime, expect crude oil to be a bumpy ride.