These are confusing times. And if I may add, confusing might just be the biggest understatement of them all. OPEC+ announced additional voluntary production cuts last week, and the market hated it so much that prices fell some ~$6/bbl since Thursday. With WTI now trading at $73 and Brent trading at $78, it's safe to say that 1) not only does the market not believe in the cut, but 2) it thinks it's inadequate.
Or... it could just be as simple as the CTAs are going max short following the OPEC+ meeting. Whatever the case, confusing times are here, and we are all stuck in it.
But I think most of the bearish sentiment is arising from this chart:
Pictures are worth a thousand words but in this case, it's creating far more harm than insights.
First and foremost, anyone who is not living under a rock expected US oil production to grow this year. That is a fact. The question was then how much growth would we see out of the US? At the start of the year, we expected an exit of ~12.9 million b/d, but with production now running at ~13.2 million b/d, the surprise was ~300k b/d.
As we explained clearly in our OMF update last Thursday, demand disappointment from China and OECD is the root cause for the OPEC+ cut, not US oil production surprising to the upside by ~300k b/d. In addition, other supply surprises like the return of Iranian barrels (+600k b/d) forced the Saudis to cut production by ~1 million b/d.
Confusing
But more importantly, the misleading thing about the chart is the timing of the drop in Saudi production and the increase in US oil production. For starters, EIA materially changed the way it defined US oil production in June 2023 with the inclusion of "transfers to crude oil supply". We have discussed this far too many times, but it bears repeating.
The issue with this inclusion is that EIA did not retroactively change the historical production figures. As a result, all US oil production figures before June 2023 were likely understated. This is why we wrote at the time (June 2023) that EIA's methodology change is going to create more confusion than clarity. People who are not attuned to the details of EIA reports will find a completely different narrative than the guys who are specialists in this.
Again, we are going to use historical examples to explain this.
From Oct to Dec 2022, EIA's monthly reported US oil production figure averaged 12.315 million b/d. Including the adjustment, the average was 13.127 million b/d. Positive adjustment averaged ~812k b/d.
We know based on EIA's June 2023 report that transfers to crude oil supply was ~650k b/d. Assuming a total lower base in production, we can guestimate that transfers to crude oil supply in Q4 2023 averaged between ~550k b/d to ~600k b/d.
Using that figure, we believe US oil production was closer to ~12.5 to ~12.55 million b/d in Q4 2022.
At today's production volume of ~13.2 million b/d, this represents a growth of ~650k b/d to ~700k b/d.
Looking at our US oil production matrix, you can see that EIA's monthly US oil production figure is finally catching up to the production proxy (green line). Going forward, we believe our production proxy line will directly reflect what EIA's monthly oil production figure will be.
Now taking a step back, the production growth doesn't look nearly as bad. Comparing it to the headline figures, however, EIA's monthly oil production will show an exit-to-exit growth of close to ~1 million b/d, and compared to the reported weekly oil production figures, it's showing a growth of ~1.2 million b/d.
The delta of ~500k b/d is what's creating all the buzz and it's entirely the problem of EIA not retroactively changing US oil production figures. Instead, the timing of this happened in June just as the Saudis announced a 1 million b/d voluntary production cut.