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Understanding the EIA’s latest crude inventory report

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Unexpected decrease in inventories

On December 31, the EIA (US Energy Information Administration) released inventory data for the week ending December 26.

Inventories decreased unexpectedly by 1.8 million barrels, or MMbbls. Analysts expected an increase of 900,000 barrels.

Now, total US commercial crude inventory stands at 385.50 MMbbls. As the above chart shows, these levels are at the higher end of the five-year range for this time of year.

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Imports

After seeing a surge in imports in the previous week, imports declined by 1.23 million barrels per day, or MMbbls/d, to 7.06 MMbbls/d in the week ending December 26.

Canadian, Mexican, Saudi Arabian, and Venezuelan imports were the major reason for the drop. Canadian imports were down by 467,000 barrels per day, or bpd. Mexican imports fell by 184,000 bpd. Saudi Arabian imports decreased by 30,000 bpd. Venezuelan imports decreased by 694,000 bpd.

This decline in imports caused a decrease in crude stocks.

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 more detail in the next part of this series.

Changes in inventories drive WTI (West Texas Intermediate) prices. In turn, this impacts oil producing companies’ profitability—like Whiting Petroleum (WLL), Hess Corp. (HES), ExxonMobil (XOM), and Marathon Oil (MRO).

Many oil producing companies are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). The ETF’s fortunes will also be directly linked to movements in crude oil prices.

Supply

The amount of crude supply available, with respect to demand, also drives crude prices. A strong supply level is bearish for crude prices—unless it’s met with parallel demand.

Lately, this has been happening in the US. Strong production levels resulted in robust crude inventory levels. They haven’t been matched by demand.

In its December Short-Term Energy Outlook, or STEO, the EIA said that output will hit 9.3 MMbbls/d in 2015. This is less than the 9.4 MMbbls/d it forecasted in its November STEO.

The EIA also increased its 2014 production forecast to 8.74 MMbbls/d. This is 0.03 MMbbls/d higher than its November forecast.

According to the STEO, total US crude oil production averaged ~9 million bpd in November.

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