Wednesday, March 31, 2010

Questionable Oil Statistics More Accurate than Other Government Numbers

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

If it's Wednesday, it oil inventory report today. At 10:30AM New York time, the EIA (Energy Information Agency) releases it weekly statistics on the amount of crude oil, gasoline and distillates in U.S. storage. The price of oil can move sharply up or down based on this information. Unfortunately, the numbers in the inventory reports are not reliable.

An article in the March 18th edition of the Wall Street Journal entitled "DOE Documents Cite Outdated Methodology, Errors in EIA's Weekly Survey" revealed why the weekly oil data could not be trusted. The Journal stated that the process utilized by the EIA to determine inventory levels hadn't kept up with important changes over the years. It went on to mention a litany of problems with data collection at the EIA including old technology and out-of-date methodology. It specifically cited an inaccurate report in September that caused an unjustified big move up in oil prices.

Knowing that there are problems with the statistics being published by the EIA, investors should immediately wonder how accurate the other numbers are that the U.S. government publishes. There are more than enough reasons to question the GDP reports, inflation statistics and employment reports. Unlike the EIA reports, which are inaccurate because of neglect, these other reports are inaccurate because of lack of neglect. Government statisticians have gone out of their way to introduce 'improvements' over the past thirty years in the how the numbers are determined in these other reports. These 'improvements' seem to have only made the numbers more and more favorable looking. When statistical adjustments only produce better numbers, they are more accurately referred to as manipulation.

The oil report today indicated that crude oil inventories went up by 2.9 million barrels last week and gasoline inventories were up 300,000 barrels. U.S. crude oil inventories and gasoline were above the upper limit of
the average range for this time of year according to the EIA.  While these numbers don't look good, who knows whether or not they are even close to the actual ones.

Problems with the EIA notwithstanding, investors should be watching oil at this point and paying attention to the stock charts. The price of oil is determined globally, not just by what happens in the U.S. Oil is entering a seasonal strong period that will last until the summer. Light sweet crude has been in a trading range from 70 to 83 for many months now.  A breakout above that range would be bullish and could happen at any time. ETFs/ETNs that investors can use to go long on oil include OIL, DBO, USO and USL.

Disclosure: None

NEXT: Agricultural Prices Weaken on Ample Supplies

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

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Oil Prices Statistics