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Can the Oil Bull Market Last?

PART:
1 2 3 4 5
Part 3
Can the Oil Bull Market Last? PART 3 OF 5

How the Oil Bulls Could Interpret the Inventory Spread

Inventory data

In the week ended September 15, 2017, US commercial crude oil inventories rose 4.6 MMbbls (million barrels) to 472.8 MMbbls for the third-straight weekly rise. This rise in oil inventories could be attributed to the damages caused to refineries on the US Gulf Coast during Hurricane Harvey.

The US refinery utilization rate is still ~83.2%, which is 13.4 percentage points below the level before Hurricane Harvey. In the week ended September 8, 2017, the rate fell to 77.7%, and so the revival in the US refinery utilization rate could contribute to the fall in US commercial crude oil stockpiles in the next few weeks.

How the Oil Bulls Could Interpret the Inventory Spread

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Inventory spread

The difference between US commercial crude oil stockpiles and their five-year average can be an important indicator for oil (UCO) (BNO) (USL) prices. This difference is referred to as the inventory spread. Any rise in the inventory spread can be a bearish factor for oil prices, and vice versa.

In the week ended September 15, 2017, inventories were 24.8%, which was 130 basis points higher than one week before. But after the EIA (US Energy Information Administration) reported the inventory data on September 20, 2017, US crude oil active futures rose 2.9% on the back of bullish gasoline and distillate inventory data.

Market forecast

For the week ended September 22, 2017, the US commercial crude oil stockpile could rise by 2.9 MMbbls, based on market estimates. A rise in inventories would likely mean another expansion in the inventories spread.

However, the API (American Petroleum Institute) reported a fall of 0.7 MMbbls on September 26. Any fall in inventories of less than 409 thousand barrels would make the inventory spread fall. Notably, the EIA (Energy Information Administration) will report the next US crude oil inventory data on September 27, 2017.

A rise in the inventory spread could pressure crude oil prices and impact equity indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) negatively.

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