Oil inventory figures reflect supply and demand dynamics, and they affect prices
Every week, the U.S. Department of Energy (DOE) reports figures on crude inventories, or the amount of crude oil stored in various facilities across the United States. Market participants pay attention to these figures because they can indicate supply and demand trends. If an increase in crude inventories is more than expected, it implies either greater supply or weaker demand and is bearish (negative) for crude oil prices. If an increase in crude inventories is less than expected, it implies either weaker supply or greater demand and is bullish (positive) 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).
Inventory draw was much larger than expected: short-term positive
On July 10, the DOE reported a decrease in crude oil inventories of 9.87 million barrels. In contrast, analysts actually expected a crude oil inventory draw of 3.20 million barrels. The large decrease in inventories compared to the smaller expected decrease in inventories was a positive signal for oil prices. Remarks from the minutes of a Fed meeting also supported crude prices, showing that further improvement in U.S. employment would be required before curtailing stimulus measures. WTI closed on the day at $106.52/barrel compared to $103.53/barrel the prior day.
U.S. crude oil production has pushed up inventories over the past few years
From a longer-term perspective, crude inventories had been much higher than they were in the past five years at the same point in the year (though they’ve recently closed in under comparable 2012 levels). There has been a surge in U.S. crude oil production over the past several years, as inventories accrued because much of the excess refinery and takeaway capacity soaked up, and it took time and capital for more to come online. This caused the spread between WTI Cushing (the benchmark U.S. crude, which represents light sweet crude priced at the storage hub of Cushing, Oklahoma) and Brent crude (the benchmark international crude, which represents light sweet crude priced in the North Sea) to blow out.
But lately, more takeaway solutions have come online
However, midstream companies have been actively looking for solutions to transport U.S. crude oil out and have helped move crude out of hubs such as Cushing. New infrastructure projects also require “pipe fill,” which is a base level of crude to fill the pipelines and move oil through the system. Pipe fill has increased demand for U.S. light sweet crude. Consequently, the spread between WTI and Brent has closed in significantly. For more on that development, please see WTI-Brent continues to close, trading at tightest levels since January 2011.
This week’s larger than expected draw in U.S. inventories was a positive short-term indicator for WTI crude prices
WTI price movements and broader oil price movements affect crude oil producers, 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 squeeze in a lower oil price environment. Additionally, oil price movements affect energy sector ETFs (exchange-traded funds) such as the Energy Select Sector SPDR Fund (XLE), an ETF that includes companies that develop and produce hydrocarbons and the companies that provide services to them.
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