Inventories Spread: Oil Prices Could See More Upside
Oil inventory data
In the week ending July 14, 2017, US crude oil inventories fell by 4.7 MMbbls (million barrels) and were at 490.6 MMbbls. The EIA reported the inventory data on July 19, 2017. On the same day, US crude oil active futures rose 1.6%.
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Oil inventories spread
The crude oil inventories spread represents the difference between US crude oil inventories and their five-year average. When the spread widens, or inventory levels keep rising to levels higher than their seasonally adjusted average levels, it usually has a negative impact on oil (UCO) (BNO) (USL) prices. On the other hand, a contraction in the spread helps support oil prices, as you can see in the above graph.
For example, in the week ending July 14, 2017, the inventories spread contracted to 25.8%—a fall of 30 basis points compared to the previous week. It was followed by a gain of 1.6% in US crude oil active futures since July 19, 2017. The EIA reported inventory data on July 19, 2017. It’s important to note that a basis point is one-hundredth of a percentage point.
US crude oil inventories could fall by 3.3 MMbbls in the week ending July 21, 2017. However, API data forecasted a fall of 10.2 MMbbls—almost three times the market estimate. In the week ending July 22, 2016, inventories rose by 1.7 MMbbls. The EIA’s crude oil inventory data for the week ending July 21, 2017, will come out on July 26, 2017.
If inventories fall as expected, it could cause the inventories spread to contract more, which would be bullish for oil. Oil would be able to build on recent gains. Also, gains in oil prices on the back of a fall in the inventories spread could help equity indexes rise such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA). Energy constituents of these equity indexes would be sensitive to oil prices.