Must-know: Why energy investors must watch crude inventories
Oil and refined product inventory data can move crude oil prices
Every week, the U.S. Energy Information Administration (or EIA) reports figures on crude inventories, or the amount of crude oil stored in facilities across the U.S. The EIA also provides data on inventories of distillate and gasoline, which are refined products of crude oil.
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The markets monitor these figures because inventory data can indicate supply and demand trends. If the increase in crude inventories is more than expected, then 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, then it implies either weaker supply or greater demand and is bullish for crude oil prices.
Crude oil prices directly affect earnings for major oil producers such as Chevron Corporation (CVX), Exxon Mobil Corporation (XOM), and Hess Corporation (HES)—all of which are major components of energy exchange-traded funds (or ETFs), such as the Energy Select Sector SPDR Fund (XLE) and the Vanguard Energy ETF (VDE).
Another important figure the EIA reports is the level of crude oil inventories at Cushing, Oklahoma. Cushing is a major inland oil hub in the U.S. and the pricing point for the North American “benchmark,” West Texas Intermediate (or WTI) crude.
Inventories from Cushing indicate how effectively growing U.S. oil production is moving from major inland production areas such as the Bakken in North Dakota and the Permian in west Texas to end refining markets. A buildup of inventories at Cushing may indicate that oil supplies are growing faster than takeaway infrastructure to end refining markets, many of which are located on the Gulf Coast, can keep up. A buildup of inventories at Cushing can cause the price of WTI crude to go down.
Last week, crude oil prices increased after the EIA’s inventory report. Continue reading the next part of this series for details.