Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

The oil market just doesn't care about these "numbers," OK?

This week offered a prime example. On Wednesday, the Energy Information Administration released its usual roundup of oil inventory numbers. These came in somewhat wide of expectations: 9.5 million barrels of crude oil flowed into U.S. storage tanks last week, versus a median expectation of 3.5 million.

The Bloomberg Terminal tracks the surprises in the weekly U.S. oil data, expressing the difference in the actual number versus the median expectation as a multiple of the standard deviation in the survey estimates. On that basis, this week's surprise was 9 times the standard deviation of estimates -- a big number, but only the fifth biggest surprise in the past year, either positive or negative. The biggest was 14.4 times -- and that was last week's figure.

What's odd is that these huge, and unexpected, inflows of oil to storage seem to have been ignored. More oil in tanks means excess supply, which should depress prices. But when that big surprise was sprung on the market last week, for example, oil actually traded up by 1.7 percent over the following six hours, according to Bloomberg data. Similarly, oil traded up initially after Wednesday's report hit the web this week.

Besides those movements on the day, the cumulative effect of all this extra oil should be having an impact.

Still Filling
Almost 190 million barrels have flowed into storage tanks in the past three years, with almost 40 million so far this year
Source: Energy Information Administration
Note: Cumulative change in U.S. commercial crude oil stocks.

Looking back to 1980, just over 10 million barrels flow into storage tanks across a typical January and February (see this). As of last Friday -- with about two more weeks of February to go -- we were already at 39.1 million barrels this year.

You would hardly know that by looking at the price action, though:

Surprisingly Indifferent
Oil inflows have almost all been higher than expected, with the last two readings way above estimates -- yet prices are curiously unmoved
Source: Bloomberg
Note: Surprise ratio calculated as actual change in oil inventory less median estimate, divided by standard deviation of survey estimates.

As my colleagues at Bloomberg News noted, speculative positioning in the main crude futures contracts is at record long levels, with OPEC members' pledge to cut supply along with several other countries being the catalyst for bulls to pile in.

So far this year, they have been able to offset the hard reality of those U.S. oil inventory numbers with some other data points, most notably early indications of OPEC countries mostly following through on their pledges. On that front, another number reported Wednesday offers some oblique support: U.S. exports of crude oil broke above 1 million barrels a day for the first time since Federal controls were eased. If that oil is going to plug supply gaps overseas, then it's possible U.S. inventory data are a lagging indicator of OPEC's cuts working.

Freight Expectations
Surging U.S. exports of crude oil may indicate supply shortfalls elsewhere
Source: Energy Information Administration

As bull arguments go, though, this is a leaky one. Besides those huge, unexpected U.S. inventory increases, it is early days on those OPEC cuts. And, as my colleague Julian Lee points out, initial high compliance with targets may not last.

Indeed, one sign of that comes from OPEC itself. Thursday brought another report, this time from Reuters, quoting unnamed sources inside OPEC saying the organization may extend or even deepen supply cuts after the initial six-month agreement ends in June.

There are two things to consider about this report. First, in saying that OPEC might continue its cuts if they haven't worked by the summer, it tells the market nothing it didn't already know.

Second, if OPEC's strategy is actually working properly, then it's worth dwelling on why its members feel the need to talk up another round of it already.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net