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Positive crude inventory draw is bullish signal, but prices slide with broad market rout

2013.04.17 - Crude InventoriesEnlarge Graph

  • 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, crude inventories declined by 1.2 million barrels compared to estimates of a build of 1.2 million barrels, meaning either stronger than expected demand, weaker than expected supply, or both. Despite this, prices declined on the day.

Every week, the U.S. Department of Energy (DOE) reports figures on crude inventories, or the amount of crude oil that is stored in various facilities across the U.S. 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 April 17th, the DOE reported a decrease in crude oil inventories of 1,233 thousand (or 1.2 million) barrels. In contrast, analysts actually expected a crude oil inventory build of 1,200 thousand (or 1.2 million) barrels. This draw in inventories (compared to the expected build) was a positive signal for oil prices. Despite this, West Texas Intermediate (WTI) crude prices were down on the day, closing at $86.68/barrel compared to the prior day’s close of $88.72/barrel. WTI crude prices have dropped in five of the past six days as commodity markets have reacted to indicators of weaker global economic growth, and gold sold off precipitously given several factors – including a plan by the financially strained nation of Cyprus to sell some of its gold reserves.

From a longer term perspective, 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 U.S. 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 U.S. crude production has also contributed to the U.S. 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 U.S. production, which should help to reduce inventories and the spread between WTI and other crudes in the future. For more on that, please see “WTI-Brent spread widened slightly last week after eight consecutive weeks of narrowing.”

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 as well as companies which provide services to them. This week’s build in oil inventories, compared to the expected build in inventories, was a positive short-term indicator for oil prices. However, oil prices largely ignored the positive inventory number in the face of broader market weakness.