Crude inventories change close to expectations, neutral for oil and oil stocks

2013.02.06 - Crude InventoriesEnlarge GraphCrude inventories are a measure of how much crude is in storage in different facilities across the US. The change in inventories is reported on a weekly basis by the US Department of Energy (DOE) and experts also try to predict what the change will be. If inventories increase more than expected, it means either demand was weaker or supply was greater, which is a negative for crude oil prices. The inverse is also true, where if inventories decrease more than expected, it means either demand was stronger or supply was weaker, which is a positive for crude oil prices. Crude oil prices most highly affect earnings for producers with portfolios slanted towards oil (versus natural gas) such as Oasis Petroleum (OAS), Denbury Resources (DNR), Chevron (CVX), and Exxon Mobil (XOM).

On February 6, the DOE reported a build in crude oil inventories of 2,623 thousand (or 2.6 million) barrels. This was only very slightly lower than the average of analyst estimates of 2,650 thousand (or 2.7 million) barrels. A lesser than expected build in inventories is indicative of either more demand or less supply, and therefore this week’s figure was a bullish indicator. However, the difference between the reported figure and the expected figure this week was very slight. Given the neutral nature of the data, oil prices were relatively flat on the day.

From a longer term perspective, one can see in the below graph that crude inventories are currently much higher than where they were in the past five years at the same point in the year.

2013.02.06 - Crude InventoriesEnlarge Graph

There has been a surge in US crude oil production over the past several years, and it is possible that inventories have built because much of the excess refinery and takeaway capacity has been soaked up and it will take time and capital for more to come online. The surge in US crude production has also contributed to the US crude oil benchmark of West Texas Intermediate (WTI) crude trading significantly below equivalent international grades. However, there is clear evidence of companies working on transportation and refinery solutions to take advantage of the surge in US production, which should help to reduce inventories and the spread between WTI and other crudes in the future.

WTI price movements and broader oil price movements have an effect on producers of crude oil, as higher prices result in higher margins and earnings. Names with portfolios slanted towards oil such as Oasis Petroleum (OAS), Denbury Resources (DNR), Chevron (CVX), and Exxon Mobil (XOM) could see margins squeezed in a lower oil price environment. Additionally, oil price movements affect energy sector ETFs such as the Energy Select Sector SPDR Fund (XLE), an ETF that includes companies that develop and produce hydrocarbons and companies which provide services to them.

The Realist Discussions

  • http://twitter.com/mrodov Michael Rodov

    Wow. That black line on the graph initially appeared like a scribble. Now I see the huge change in inventories this year. Eye-opening and not very good for an energy portfolio.

    On the other hand, these inventory levels may be a good buffer for XOM and within XLE if we start seeing geopolitical turmoil this year, possibly with Obama’s Mideast trip coming up and Israel’s deadline for Iran approaching.

  • macro123

    What do you think was the catalyst for the turn we saw in May? Have the facilities in Cushing reached their peak this year in terms of storage. Is storage going elsewhere – into tankers, port terminals etc?