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Oil's Fall: A Reversal or a Breather in the Rally?

PART:
1 2 3 4
Part 3
Oil's Fall: A Reversal or a Breather in the Rally? PART 3 OF 4

Could Oil Inventories Maintain Their Bullish Momentum?

Inventory data

According to the EIA (U.S. Energy Information Administration), US crude oil inventories fell 7.2 MMbbls (million barrels) in the week ended July 21, 2017. The fall was twice the expected fall of 3.3 MMbbls. Bullish inventory data buoyed oil prices by 1.8% on the same day.

Could Oil Inventories Maintain Their Bullish Momentum?

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Inventory spread

A rise in surplus crude oil inventories above their five-year average could impact oil prices (UCO) (BNO) (OIIL), whereas a contraction in the inventory spread could bring some relief for oil bulls. The graph above illustrates this relationship.

In the week ended July 21, 2017, the inventory spread contracted by 1.5 percentage points from the week before. Since July 26, 2017, when this data was announced, US crude oil futures have gained 0.8%.

Market estimates

On August 2, 2017, the EIA will report oil inventory data for the week ended July 28, 2017. The market expects a fall 3.2 MMbbls in US crude oil inventories. In contrast, the American Petroleum Institute reported a rise of 1.8 MMbbls in crude oil inventories last week.

If the EIA also reports a buildup in oil inventories, then the inventory spread expansion could extend the current pause in oil’s rally. This weakness in oil prices could also impact equity indexes such as the S&P 500 (SPY) and the Dow Jones Industrial Average Index (DIA).

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