- 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 increased by 0.9 million barrels compared to estimates of a build of 2.0 million barrels meaning stronger than expected demand, weaker than expected supply, or both. Prices rallied on the day due to these figures and also a large draw on gasoline inventories.
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), Hess Corp. (HES), Chevron (CVX), and Exxon Mobil (XOM).
On April 24, the DOE reported an increase in crude oil inventories of 947 thousand (or 0.9 million) barrels. In contrast, analysts actually expected a crude oil inventory build of 2,000 thousand (or 2.0 million) barrels. The smaller than expected build in inventories was a positive signal for oil prices. Additionally, market participants also commented that the large decrease in gasoline inventories may have affected crude oil trading. Gasoline inventories decreased by 3.93 million barrels compared to an estimated draw of 600,000 barrels, indicating strong demand for the commodity, which is one of the refined end products of crude oil. West Texas Intermediate (WTI) crude prices were up on the day, closing at $91.43/barrel compared to the prior day’s close of $89.18/barrel.
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 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. For more on that, please see “WTI-Brent spread widened narrowed slightly last week”.
This week’s build in oil inventories compared to the expected build in inventories was a positive short-term indicator for oil prices. 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), Hess Corp. (HES), Chevron Corp. (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.
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