Oil on the Verge of Collapse: What the Inventory Spread Indicates
Crude oil inventory data
US commercial crude oil inventories rose ~8.2 MMbbls (million barrels) in the week ending March 3, 2017. Inventories reached a historic high level of ~528.4 MMbbls for the week, going back to at least 1982, according to the EIA (US Energy Information Agency) data released on March 8, 2017. US crude oil inventories rose for the ninth consecutive week.
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Inventory spread and crude oil
On March 3, 2017, crude oil inventories were 159.5 MMbbls above their five-year average—the highest level since January 2011. The relationship between crude oil inventories and crude oil prices is inverse, as you can see in the above graph.
The spread between crude oil inventories and the five-year average has widened, starting in January 2015, after it broke four-year highs and hit record levels. During that period, crude oil prices (USO) (USL) (UCO) (BNO) were falling. But crude oil prices bottomed out in early 2016, while inventories topped out. This inverse relationship was also seen in smaller magnitudes in the following months.
It will be interesting to see the impact of the EIA’s report for the week ending March 10, 2017. The data will be released on March 15, 2017. Analysts’ estimates suggested a build in crude oil inventories by 3.3 MMbbls for the week ending March 10, 2017.
Impact of inventory data
The recent spike in the inventory spread has seen crude oil prices drop below the crucial $50 level. A further rise in the inventory spread will likely push crude oil prices even lower.
Crude oil price movements are important for oil-weighted stocks, and so any increase in the inventory spread could impact energy stocks in your portfolio. The impact of the inventory spread on energy stocks could consequently affect broader market indices such as the S&P 500 index (SPY) (SPX-INDEX) and the Dow Jones Industrial Average (DIA) (DJIA-INDEX).
Crude oil inventories that exceed their historic averages are also important for ETFs such as the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the Energy Select Sector SPDR ETF (XLE), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), and the ProShares UltraShort Bloomberg Crude Oil (SCO).
In the next part, we’ll analyze the relationship between crude oil and the US Dollar Index (UUP).