Why crude oil prices dropped despite falling inventories
The EIA’s crude and refined product inventory data
On July 30, the U.S. Energy Information Administration (or EIA) released crude and refined product inventory data for the week ending July 25. Crude oil inventories decreased ~3.7 million barrels. This was the fifth consecutive drop and almost double analysts’ forecast of a ~1.8 million barrel decline.
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Crude inventories continue to decline as a result of strong demand from refineries. For the week ended July 25, the EIA reported that refineries were operating at 93.5% capacity—0.3% lower than last week, but still reaching 16.6 million barrels per day.
Oil prices dropped last week
Despite the considerable decrease in crude inventories, oil prices have been in a downward trend this entire week. WTI crude oil prices closed at $98.40 per barrel on 31 July—a decline of ~2% compared to the previous day’s market close of $100.27 per barrel.
Factors contributing to a decline in oil prices
- Fire in Kansas Refinery: CVR Refining’s 115,000-barrel-a-day refinery in Coffeyville, Kansas, had to shut down as a result of a fire that erupted on Tuesday. The refinery, situated close to the major storage hub at Cushing, Oklahoma, is a major West Texas Intermediate (WTI) crude oil consumer. The expected decline in demand as a result of the refinery shutdown put downward pressure on WTI crude prices.
- Strong U.S. Macroeconomic data: On July 30, the Department of Commerce released estimates for key U.S macroeconomic data for 2Q14. U.S. GDP increased 4% year-over-year compared to the first quarter, when GDP decreased 2%. This news caused the dollar to increase to a ten-month high. A stronger dollar makes dollar-priced commodities like oil less appealing, especially for foreign currency holders, and limits their demand.
- Increase in gasoline stockpiles: Gasoline inventories expanded for the fourth week in a row as a result of high refinery runs (anticipating demand in the peak summer driving season). Surplus inventories have put downward pressure on gasoline prices. As a result, the gasoline crack spread (the difference between the price of crude oil and the price of finished products—typically, gasoline and distillate fuel), has been declining. This, in turn, has put downward pressure on oil prices.
Key companies affected
Lower oil prices hurt the margins of oil-weighted companies like Oasis Petroleum (OAS), Hess Corporation (HES), Chevron (CVX), and ExxonMobil (XOM). Most of these companies are components of the Energy Select Sector SPDR ETF (XLE).
Gasoline and distillates
While crude inventories have considerably fallen, gasoline and distillates have seen positive additions.
The following part of this series discusses U.S. demand trends for diesel and gasoline.