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Is a U-Turn in Oil Prices Possible?

PART:
1 2 3 4
Part 3
Is a U-Turn in Oil Prices Possible? PART 3 OF 4

Is the Oil Inventory Spread Supportive of Oil Prices?

EIA inventory data

In the week ended June 30, 2017, US crude oil inventories fell 6.3 MMbbls (million barrels) to 502.9 MMbbls. The EIA (U.S. Energy Information Administration) reported these data on July 6, 2017.

The fall was above the market’s expectation and the API’s (American Petroleum Institute) earlier reported estimate. It was also higher than the draw of 2.2 MMbbls that occurred during the same period in 2016.

Is the Oil Inventory Spread Supportive of Oil Prices?

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Oil inventories spread

In the week ended June 30, 2017, US crude oil inventories were 26.3% higher than their five-year average. A week earlier, this inventory spread was at 26.7%. On a week-over-week basis, the spread fell slightly. Usually, a fall in inventories should support oil prices because it indicates the rebalancing of excess supply in the oil market. The chart above illustrates the relationship between the inventory spread and crude oil prices.

However, since the July 6 release of the EIA’s US crude oil inventory data for the week ended June 30, 2017, US crude oil active futures have fallen 1.1%. Earlier in this series, we discussed the factors that affected crude oil prices in the week ended July 11, 2017.

How far can oil inventories fall this week?

On July 12, 2017, the EIA will report US crude oil (UCO) (BNO) (OIIL) inventory data for the week ended July 7, 2017. According to API data, US crude oil inventories fell ~8.1 MMbbls in the week ended July 7, 2017. However, analysts’ estimates point to a draw of 3.2 MMbbls, less than 50% of the API’s estimated draw. Last year, in the week ended July 8, 2016, US crude oil inventories fell ~2.5 MMbbls.

Impact of the inventory spread

The inventory spread is an important driver of oil prices. It could affect broader equity indexes such as the Dow Jones Industrial Average (DIA) and the S&P 500 Index (SPY), as oil affects their energy constituents. Moreover, inflation expectations, which can affect stock market returns, also track oil prices.

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