Inventories Spread: Why the Recovery in Oil Prices Could Continue
US crude oil inventory data
US commercial crude oil inventories fell by 6 MMbbls (million barrels) to ~465 MMbbls in the week ended September 29, 2017. The rise in the US crude oil exports to ~2 million barrels per day in the same week could be a factor behind the increased inventories. The US refinery utilization fell by 50 basis points in the same week compared to a week before.
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The spread between US crude oil inventories and their five-year average is known as the “inventories spread.” Oil (UCO) (BNO) (OIIL) prices and the inventories spread have an important relationship. The two usually move opposite of each other. So, if the inventories spread expands, oil prices could fall, and vice versa.
In the week ended September 29, 2017, the inventories spread contracted by 1.7 percentage points. Since the release of the inventory data by the EIA on October 4, 2017, US crude oil futures rose 1.9% to date.
The market expects US commercial stockpiles to fall by 1.9 MMbbls for the week ended October 6, 2017. The EIA will release its inventory data on October 12, 2017. However, any rise up to 6.7 MMbbls won’t increase the inventories spread. So, if the inventories spread contracts further, the recovery in oil prices may continue.
Fluctuations in the inventories spread could influence equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) because crude oil is a growth-driven asset, and oil and gas companies form part of these indexes.