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Why oil and natural gas prices seemed to ignore inventory figures

Why oil and natural gas prices seemed to ignore inventory figures (Part 1 of 2)

Must-know: Why oil traded flat on the latest inventory figures

Oil inventory figures reflect supply and demand dynamics and affect prices

Every week, the U.S. Department of Energy (or DOE) reports figures on crude inventories, or the amount of crude oil stored in facilities across the U.S. Market participants pay attention to these figures, as they can indicate supply and demand trends. If the increase in crude inventories is more than expected, it implies either greater supply or weaker demand and is bearish for crude oil prices. If the increase in crude inventories is less than expected, it 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).

2014.01.31-US Crude InventoriesEnlarge Graph

Despite a significant build of crude stocks, both gasoline and distillate showed a larger-than-expected drop in inventories

On January 29, the DOE reported an increase in crude inventories of 6.42 million barrels, significantly higher than analysts’ expectations of a build of 2.56 million barrels. Generally, a larger-than-expected build of crude storage drives prices lower, as it indicates either less demand or more supply than expected. However, crude traded flat on the day, to close at $97.36 per barrel, $0.05 per barrel less than the previous day. Despite a larger-than-expected build in crude oil inventories, refined products such as gasoline and diesel had declines in inventories that were significantly larger than expected, which signaled higher demand for crude. Ultimately, signals appeared mixed and crude oil traded roughly flat on the day.

Background: U.S. crude oil production has pushed up inventories over the past few years

From a longer-term perspective, for most of 2013, crude inventories were much higher than they were in the past five years at the same point in the year (though they closed in under comparable 2012 levels at points throughout the year). There has been a surge in U.S. crude oil production over the past several years. Inventories had accrued because much of the excess refinery and takeaway capacity had been 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.

However, over the course of 2013, this closed in considerably, so that the two benchmarks traded almost in line again, as more takeaway capacity from the Cushing hub came online. Recently, however, the spread has widened back out (see Why the new Keystone XL pipeline helps narrow the WTI-Brent spread).

This week’s crude oil inventories data was a neutral short-term indicator for oil 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 squeezed in a lower oil price environment. Also, 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 the companies that service them.

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