Must know: How inventories data can affect the market

Ingrid Pan - Author

Nov. 20 2020, Updated 10:52 a.m. ET

Oil inventory figures reflect supply and demand dynamics and affect prices

Every week, the U.S. Department of Energy (or DOE) reports figures on crude inventories, or the amount of crude oil stored in facilities across the U.S. The market participants pay attention to these figures, as they can indicate supply and demand trends. If the increase in crude inventories is more than expected, it implies either greater supply or weaker demand and is bearish for crude oil prices. If the increase in crude inventories is less than expected, it implies either weaker supply or greater demand and is bullish for crude oil prices. Crude oil prices highly affect earnings for major oil producers such as Oasis Petroleum (OAS), Hess Corp. (HES), Chevron (CVX), and Exxon Mobil (XOM).

Crude prices rose despite the negative crude and distillate inventories figures 

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On February 12, the DOE reported the inventories data for crude for the week ended by February 7. Crude oil inventories increased by 3.27 million barrels—higher than analysts’ expectations of a build of 2.63 million barrels. Generally, a larger-than-expected build of crude storage drags prices lower, as it indicates either weaker demand or stronger supply than expected. Plus, distillate inventory decreased by 0.73 million barrels compared to analysts’ expectation of a 1.86 million barrel drop. This smaller-than-expected drop in distillate inventory indicated a weaker demand for crude oil, and can be viewed as a negative signal for crude prices. However, gasoline, another refinery product of crude, experienced a 1.85 million barrel drop in inventories last week, much more than analysts’ expectation of a 0.01 million barrel drop. This larger-than-expected drop could act as a positive catalyst for crude prices, as it indicated a greater demand for crude than expected. Plus, new takeaway infrastructure helped to  transport crude oil out of Cushing, a major oil hub, which reduced inventories there. The reported Cushing supplies continued to fall by 2.7 million barrels last week, which was the largest weekly decline since July, driving the total stocks there to 37.6 million barrels.

The market also weighed this as a positive catalyst for WTI prices. For more information on the effect of the new Keystone XL pipeline, please see Why the new Keystone XL pipeline helps narrow the WTI-Brent spread. Ultimately, crude finished slightly up on the day, to close at $100.37 per barrel—$0.43 per barrel higher than the previous day.

Background: U.S. crude oil production has pushed up inventories over the past few years

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From a longer term perspective, for most of 2013, crude inventories were much higher than they were in the past five years at the same point in the year (though they closed in under comparable 2012 levels at points throughout the year). There has been a surge in U.S. crude oil production over the past several years. Inventories had accrued because much of the excess refinery and takeaway capacity had been soaked up, and it took time and capital for more to come online. This caused the spread between WTI Cushing (the benchmark U.S. crude, which represents light sweet crude priced at the storage hub of Cushing, Oklahoma) and Brent crude (the benchmark international crude, which represents light sweet crude priced in the North Sea) to blow out.

However, over the course of 2013, this closed in considerably, so that the two benchmarks traded almost in line again, as more takeaway capacity from the Cushing hub came online. Recently, however, the spread has widened out again (see Why did the WTI-Brent oil spread widen out last week?).

Despite the higher-than-expected build in crude, lower-than-expected drop in distillate,  crude still traded slightly up by $0.43 per barrel. This was in part due to falling inventories in Cushing. WTI price movements and broader oil price movements affect crude oil producers, as higher prices result in higher margins and earnings. Names with portfolios slanted towards oil such as Oasis Petroleum (OAS), Hess Corp. (HES), Chevron Corp. (CVX), and Exxon Mobil (XOM) could see margins squeezed in a lower oil price environment. Also, oil price movements affect energy sector ETFs such as the Energy Select Sector SPDR Fund (XLE), an ETF that includes companies that develop and produce hydrocarbons and the companies that service them.


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