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).
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Crude prices fell despite a larger-than-expected drop in inventories
On April 2, the DOE reported the inventories data for crude for the week ended March 28. Crude oil inventories decreased by 2.38 million barrels—compared to analysts’ expectations of a build of 1.42 million barrels. Distillate, one of the refined products of crude oil, experienced a greater-than-expected build in inventories. The reported data showed that last week, distillate inventories increased by 0.55 million barrels, compared to analysts’ expectation of a build of 0.18 million barrels. Gasoline, another major product of refined crude, however, experienced a greater-than-expected drop in inventories last week. The DOE reported a drop of 1.57 million barrels in gasoline inventories—larger than analysts’ expectation of a 1.28 million barrel decline. Generally, a greater-than-expected drop in crude or refined products storage supports prices, as it indicates either stronger demand or weaker supply than expected. As a result, last week’s inventory figures seem to support crude prices.
Plus, inventories at the oil hub of Cushing decreased by 1.23 million barrels, the eighth week in a row that inventories at Cushing have declined. This is a signal that crude stocks at the Oklahoma hub are having an easier time getting to end markets, and continued declines at Cushing should bring WTI oil prices more in line with Brent. For more on this trend, see Why the WTI-Brent oil spread narrowed to near $6 per barrel.
However, crude prices traded slightly lower on the day. This fall in prices was partly because the market wrote off the larger-than-expected inventories drop as a one-week aberration, since the Houston Ship Channel, one of the main crude import channels for the U.S., closed between March 22 and March 25. The closure limited the imports of crude oil and required refiners to draw more supplies from storage. Plus, the market continued to fear sluggish demand, as crude demand typically falls in March when refineries shut down units to undergo maintenance and prepare to blend summer-grade gasoline.
As the market weighted more on worries of continuously weak oil demand, crude prices slightly fell on the day and finished at $99.62 per barrel compared to $99.74 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.