ENERGY PRICES WERE WEAK ON MONDAY… as a potential influenza pandemichung over the market. As we look ahead to today the market will look to take its marching orders from the equities, May natty’s expiry notwithstanding. In this vein, keep an eye on the U.S. consumer confidence and CaseShiller home indices.
DOE v. API: The market’s consensus ahead of last week’s oil inventory reports was for a seasonally large build of around 2.5 MMbbls in crude oil. The NYMEX crude oil market traded accordingly. That is to say, the market opened the week plunging by nearly $4 a barrel or 7.8 percent. Granted, that selloff was likely in sympathy with the May contract’s expiry. Nevertheless, the move was significant, as analyzed in today’s issue of The Schork Report.
The electronic market then got a jolt after the Tuesday pit closed when the API reported an “unexpected” countercyclical draw of 1.0 MMbbls. Of course, that report was immediately counterfeited Wednesday morning after the DOE reported greater than expected, greater than normal 3.9 MMbbl build. But by that time the damage had already been done as far as the price path for the Brent and WTI markets were concerned.
In this regard, the disparity between American Petroleum Institute (API) and the Department of Energy (DOE) releases is a constant source of confusion. With the API being a self regulated trade body, we would expect traders to favor the DOE’s official, government mandated reports. This was less of an issue when both figures were released on Wednesday mornings and the market could assimilate both, but with the API now releasing on Tuesdays, traders are acting strongly on API figures in the hopes of exploiting an arbitrage opportunity.
Does this make sense? If it works yes, but…
Unfortunately, such opportunities are rare at best and dangerous at worst, as we saw last week when the API reported a 1.01 MMbbl draw on Tuesday night but the DOE booked a 3.9 MMbbl draw. Anyone who bought Tuesday night (range between 48.31 and 49.29) on that “bullish” API report likely (should have) got stopped out Wednesday morning after the market pulled back to 47.89 in the wake of the DOE’s report.
Looking at historical values, the API and DOE figures have a mean difference of -0.994 MMbbls and a skewness of zero. That means the API usually underestimates the DOE’s total stocks of crude by 0.994 MMbbls. But the values are distributed symmetrically around this mean, so in the long run the API underestimates, but on a week by week basis it’s just as likely to move above or below this mean.
Looking at the absolute difference between API and DOE figures in the chart in today’s issue of The Schork Report, we see they follow a Gamma distribution. The Gamma distribution is often used to model waiting times, say at a bus stop. We know the bus will usually arrive on schedule (give or take a few minutes), but on occasion there’s an accident and we’re waiting for hours. Similarly, we should expect the difference between API and DOE releases to be a minimal 1mmbls, and shouldn’t let a few extreme observations define the norm. Unfortunately, there’s no magic formula to convert API figures to DOE values and no linear relationship seems to hold conclusively. The releases do appear to be slightly affected by seasonality, with January, April and November seeing the API overestimate the DOE over the 1998-2008 timestep.
The bottom line is that the API figures have an absolute margin of error of just over 2.3 mmbls. That may seem small when we look at total inventories, which reach the hundreds of millions, but anyone hoping to exploit the weekly change, which averages 2.06 mmbbls for the DOE, could be wiped out with an alarming frequency. Keep that in mind when the API releases its estimate tonight. The seasonal norm is a 1.8 MMbbl build and the early consensus is a 2.0 MMbbl build.
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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.