On Sunday night, the Academy of Motion Picture Arts and Sciences made a blunder of spectacular proportions. Just past midnight (EST), as every viewer sat waiting for the final, perhaps most high profile Oscar – best picture – to be awarded, the presenters named the wrong film! Actress Faye Dunaway and Actor Warren Beatty declared LaLa Land, a musical favorite, the winner. However, just as the acceptance speeches started, it turned out that the presenters had been given the wrong card and, in fact, Moonlight, an underdog independent film, had won.
Apparently the Academy has never made such a mistake before (although the 2015 Miss Universe pageant did) and the aftershocks were confusing and awkward for everyone involved. However, to those in the oil trading business, this kind of gaffe is surprisingly common and can have significant financial effects.
Take this example:
Back in March 2015, the Energy Information Administration (EIA) reported U.S. crude oil output was averaging 9.422 million bpd. Subsequent weeks’ data showed declining production. This signaled to traders that U.S. production had reached a peak and was beginning to decline. Oil futures prices began to rise. But then, at the end of May, the EIA suddenly reported that crude oil production jumped by 304,000 bpd. It turned out that this abrupt gain was not really a reflection of growing U.S. production. It was actually a correction of incorrect data from two months earlier. Those initial oil production numbers were really estimates the EIA made using a model. By the time May came around, the EIA had the real numbers to report from February and March. Instead of amending its previous data, the EIA rolled it into the May 22 report. This was a big mistake with consequences for the market.
Since then, the EIA has changed its methods of reporting. In September 2015, the EIA stopped relying on state agencies to report tax information and production data, which can often lag by as much as a month, the EIA moved to a survey method that uses production samples from producers in multiple states and the Gulf of Mexico. During times of great volatility in the oil market, traders and investors rely on the EIA’s weekly production statistics to understand how U.S. oil production is reacting to the market.
Had the EIA reported accurate production numbers, the price of oil might not have soared up to $60 a barrel that spring, because traders would have understood that U.S. production was not dropping nearly as quickly. At that time, many market watchers concluded that oil prices had bottomed out in January at $49 from their plunge induced by OPEC. In fact, WTI did not bottom out until it hit $29 in January 2016.
The lessons here are twofold:
1) Understanding how data is collected, processed and released to the public is almost as important as the data itself. When it comes to crude oil production, collecting and reporting accurate data every week is challenging and is not accurate all of the time. Multiple sources of data (for example, API, Platts, IAE, JODI, TankerTrackers.com, and Thomson Reuters) are useful, but investors must understand the drawbacks of each.
2) Stay up to watch the end of the show. You never know when there might be an interesting, maybe even profitable, twist.
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