There Is Way Too Much Misinformation On U.S. Oil Production

Thanks to the EIA’s new quest of eliminating the adjustment factor, people are now completely misunderstanding U.S. oil production.

In EIA’s latest weekly oil storage report, it re-benchmarked U.S. weekly oil production higher by ~300k b/d. For those of you who are unfamiliar with the re-benchmarking method, the weekly U.S. oil production figure is derived from EIA’s short-term energy outlook report or STEO. The STEO figures are derived from a combination of real data (EIA 914/monthly supply) and EIA’s own estimate.

But at the start of the year, the new EIA administrator, following months of scrutiny on the unexplainable elevated adjustment figure, decided to embark on a study to identify why the adjustment is so high. During this study period, it found that “transfers to crude oil” and under-reported U.S. crude production were factors that contributed to elevated adjustment.

From what we’ve seen so far in the monthly reports, roughly 500k b/d to 600k b/d are attributed to “transfers to crude oil,” while the remainder was attributed to under-reported production.

Taking all this into account, our methodology of always using the adjustment to calculate real supply in the U.S. was unchanged by this methodology change from the EIA.

You can see this in our oil production matrix.

Now you will notice that blue-dotted line going straight up. That’s the EIA attempting to explain away the ridiculous weekly adjustment figure.

But we want you to take a closer look at our production matrix. If you go all the way back to May 2018, you will notice the closely fitted lines amongst all of the things we track. By 2019, there was a separation between reported U.S. oil production (EIA 914) and the EIA 914 + adjustment figure. That’s when transfers to crude oil became a much bigger thing, which in our view, is likely what caused adjustment to start becoming so elevated.

In fact, the adjustment became such a big issue that we started incorporating “plant condensate” or our version of the adjustment into our weekly U.S. crude storage estimates. And since we’ve started tracking this, it averaged ~500k b/d from 2018 to 2023.

But this is where things get really interesting.

If you look at our modified adjustment, we only separate out actual imports and exports to what EIA reports. But if U.S. oil production is structurally under-reported, then our modified adjustment will be elevated regardless. Similarly, with the methodology change that the EIA has adopted, our modified adjustment will become structurally lower going forward. Net-net, there won’t be any real change to the supply side, since all of this has been included from the beginning.

So to summarize, EIA’s attempt at solving the mysteries of the adjustment factor is leading the public to believe that there’s been a major surge in U.S. oil production, when in fact, it’s the exact opposite.

Now let’s talk about the fun stuff…

In our latest associated gas production update, we’ve seen a meaningful drop in production. You will notice that this is in stark contrast to what we are seeing on the crude production side.

In addition, if we look at our high-frequency U.S. oil production tracking, we don’t see it making a new high by year-end.

In essence, we don’t expect U.S. oil production to push higher going forward. Without an uptick in associated gas production, EIA’s own adjustment figure is going to tip into a consistent negative, which will suggest that U.S. oil production is overstated at ~13.2 million b/d.

Conclusion

Beware of oil tourists talking about how U.S. oil production increased 1.2 million b/d from the end of last year to today. They don’t know what they are talking about.

The reality is that U.S. oil production is growing, but because we are comparing apples to oranges, y-o-y comparisons become irrelevant when discussing U.S. oil production going forward. You can thank/blame the EIA for that one.