How did the oil and gas market read the latest inventory report?

Part 2
How did the oil and gas market read the latest inventory report? (Part 2 of 2)

Why oil prices finished up despite a bearish inventory report

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).

2014.04.11-US Crude InventoriesEnlarge Graph

Crude prices rose despite a larger-than-expected build in inventories

On April 9, the DOE reported the inventories data for crude for the week ended April 4. Crude oil inventories increased by 4.03 million barrels—well above the 0.97 million barrel rise analysts anticipated. Generally, a greater-than-expected build in crude or refined products storage hurts prices, as it indicates either weaker demand or stronger supply than expected. As a result, last week’s inventory figures seem to hurt crude prices.

However, gasoline, a major product of refined crude, experienced a greater-than-expected drop in inventories last week. The DOE reported a drop of 5.18 million barrels in gasoline inventories—larger than analysts’ expectation of a 0.94 million barrel decline. The large drop in gasoline stocks may have given support to crude oil prices. However, some market participants have pointed out that at this time of year, many refineries are performing normal seasonal maintenance, which results in reduced gasoline output. So the decline in gasoline inventories may also have been related to refinery maintenance.

Distillate, another major refined product of crude oil, experienced a slightly greater-than-expected build in inventories. The reported data showed that last week, distillate inventories increased by 0.39 million barrels, compared to analysts’ expectation of a drop of 0.29 million barrels.

Altogether, crude prices traded higher on the day, as the market also took into account the effect of geopolitical tensions in Libya, where rebels continue to control major oil infrastructure, which reduces oil exports from the country. As a result, the market remains concerned about crude supply in the near future. Plus, the market continued to digest the EIA’s short-term energy outlook released this Tuesday. The report indicated a slightly higher demand for gasoline and distillate in the second quarter this year, and the market read this as a positive catalyst for fuel prices.

As the market weighted more on worries of Libya oil supply and the positive signal given by the EIA’s report, crude prices slightly rose on the day and finished at $103.60 per barrel compared to $102.56 per barrel the previous day.

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. Crude oil inventories can have a marked effect on oil prices, and so they can be an important indicator to monitor for people investing in energy companies—particularly upstream names with a high proportion of oil production.

To learn more about investing in the energy and power space, see the Market Realist series Strong oil activity continues to drive higher US oil rig counts.

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