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Large oil inventory draw supportive of oil prices, WTI breaks $100

2013.07.07 - Crude Inventories 3Enlarge 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 decreased by 10.35 million barrels compared to estimates of a draw of 2.25 million barrels meaning stronger than expected demand, weaker than expected supply, or both. WTI crude oil prices closed down slightly on the news.

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 July 3, the DOE reported a decrease in crude oil inventories of 10,347 thousand (or 10.35 million) barrels. In contrast, analysts actually expected a crude oil inventory draw of 2,250 thousand (or 2.25 million) barrels. The increase in inventories compared to the expected decrease in inventories was a negative signal for oil prices. Crude prices were also supported by geopolitical unrest in Egypt. WTI closed on the day at $101.24/barrel compared to $99.60/barrel the prior day.

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 continues to close to trade at tightest levels since January 2011”.

This week’s larger than expected draw in inventories was a positive short-term indicator for oil. 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.