Thoughts On EIA's Adjustment Update
Our take: Nothing we didn't already know.
Joe DeCarolis, the EIA Administrator, updated everyone on the latest development of why EIA's adjustment is so elevated. The takeaway was that:
Production was under-reported.
Crude blending.
EIA needs a new category to separate crude and condensate.
Back in 2018, we went through the same ordeal trying to figure out EIA's adjustment factor. At the time, we made numerous attempts in contacting the EIA, and the answer we got was plant condensate.
See the thing that the EIA is lagging severely behind on is the definition of condensate. In EIA's case, it only considers condensate as a byproduct of natural gas wells. But because US shale oil wells are gassy in nature and have a high NGL content, it doesn't know exactly how to categorize this. In addition, when producers report production, they are reporting crude as crude, and NGLs as NGLs. EIA's survey methodology does not capture that all too well, which means that by the time it ends up at the refineries, it gets all mixed up.
Now, what does all this mean?
US crude storage is significantly lighter than in the past.
There's a reason why WTI backwardation gets extreme anytime US commercial crude storage gets close to ~400 million bbls.
In the chart above, you can see the historical average of 2010-2014. We are well above the old 5-year average, but what you may not realize is that there are two factors that will permanently prevent us from going back to that level:
Linefill (the crude needed for pipelines to operate) is estimated to be around ~90 million bbls.
Lighter crude grades make it impossible for inventories to drain back down to that level.
If you go through that tweet thread, Joe talks about refineries blending the crude. For industry experts like Tim Dallinger, none of this comes as a surprise because they've been doing this already for the past few years.
The blending part is what makes this whole thing complicated and masks the real useable amount of crude in the US.