Crude inventories change close to expectations, neutral for oil and oil stocks
Interested in XOM? Don't miss the next report.
Receive e-mail alerts for new research on 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.
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.