Crude inventories build last week weigh down oil prices
- Market participants watch the change in the amount of crude inventories to gauge supply and demand dynamics, with large inventory builds representing weak demand/strong supply and large inventory draws representing strong demand/weak supply, generally speaking.
- Last week’s build in crude inventories was significantly larger than expected, meaning weaker than expected demand, stronger than expected supply, or both. Oil prices traded down on the day.
Every week the US Department of Energy (DOE) reports figures on crude inventories, or the amount of crude oil that is stored in various facilities across the US. Market participants pay attention to these figures as they can give an indication of supply and demand trends. If the increase in crude inventories is more than expected, that implies either greater supply or weaker demand and is bearish for crude oil prices. If the increase in crude inventories is less than expected, that implies either weaker supply or greater demand and is bullish for crude oil prices. Crude oil prices highly affect earnings for major oil producers such as Oasis Petroleum (OAS), Denbury Resources (DNR), Chevron (CVX), and Exxon Mobil (XOM).
On March 6, the DOE reported a build in crude oil inventories of 3,833 thousand (or 3.8 million) barrels. This was higher than the average of analyst estimates of 788 thousand (or 0.8 million) barrels. This larger than expected build in inventories was a negative signal for oil prices. West Texas Intermediate (WTI) crude closed lower on the day at $90.43/barrel compared to the prior day’s closing price of $90.82/barrel.
From a longer term perspective, one can see in the top 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. This week’s larger than expected build in inventories was a negative short-term catalyst for oil prices.
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