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A key update on the EIA’s latest crude oil inventory report

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Dec. 22 2014, Updated 5:39 p.m. ET

EIA inventory data

On December 17, the US Energy Information Administration (or EIA) released its inventory data for the week ended December 12.

Inventories decreased by 847,000 barrels, though analysts had expected a much higher drop of 2.25 million barrels.

Total US commercial crude inventory now stands at 379.9 MMbbls (million barrels). As the chart above shows, these levels are at the higher end of the five-year range for this time of year.

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Refinery demand

An increase or decrease in inventories is driven by demand and supply dynamics.

The main source of crude demand is from refineries. Refinery input levels affect inventory draws and builds. Increased crude input demand is bullish for oil prices. We’ll discuss this demand side of the equation in detail in the next part of this series.

Changes in inventories drive WTI prices, which in turn impact the profitability of oil producing companies such as Whiting Petroleum (WLL), Chevron Corp. (CVX), ExxonMobil (XOM), and Marathon Oil (MRO).

Many oil-producing companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). So XOP’s fortunes will also directly link to movements in crude oil prices.

Supply

The amount of crude supply available with respect to demand also drive crude prices. A strong supply level is bearish for crude prices unless it meets with parallel demand. This is what has been happening in the US of late. Strong production levels have resulted in robust crude inventory levels and have been unmatched by demand.

Last week, although US crude production increased only by 19,000 bpd (or barrels per day) from the week earlier, to 9.13 million barrels per day, these production levels are still ~1 MMbbls per day higher compared to a year ago. They’re also the highest in about 30 years.

In its December “Short-Term Energy Outlook” (or STEO), the EIA said that output will hit 9.3 MMbbls per day in 2015—less than the 9.4 MMbbls per day it had forecast in its November STEO but still the most since 1972.

The EIA also increased its 2014 production forecast to 8.74 MMBpd in 2014—0.03 MMBpd higher than its November forecast. Also per the STEO, total US crude oil production averaged an estimated 9.0 million barrels per day in November.

Imports

A drop in imports was the major reason for an inventory draw last week. Crude oil imports fell by 564,000 bpd to 7.1 MMBpd, pushing US crude stocks 847,000 barrels lower.

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