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EIA crude inventory report: Record production levels fuel oil glut

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Mar. 7 2015, Updated 9:05 p.m. ET

Crude inventories rise for the seventh straight week

On February 25, the EIA (U.S. Energy Information Administration) reported that crude inventories crushed analysts’ expectations yet again. The inventories increased 8.4 million barrels, or MMbbls, in the week ending February 20.

This was more than double the estimated 4 MMbbls increase. It represented a 2% increase over the prior week’s inventory levels.

The total US commercial crude inventory now stands at 434 MMbbls. It set another all-time high record. Inventories passed their previous high record of ~426 MMbbls. The previous record was set last week.

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Changes in inventories drive WTI (West Texas Intermediate) prices. This impacts the profitability for companies that produce oil—like Occidental Petroleum (OXY), Hess Corp. (HES), ConocoPhillips (COP), and Murphy Oil (MUR). These companies make up ~5% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Supply-related factors drive crude inventories

For the past few weeks, inventory movement has been driven by strong crude oil production. Last week, output touched ~9.29 million barrels per day, or MMbbls/d. The output increased 5,000 barrels per day, or bpd, over the prior week’s levels. At these levels, the output levels are at their highest level in weekly data going back to 1983.

An increase in imports also caused a surge in inventories over the past few weeks. Last week, imports increased 174,000 bpd to ~7.3 MMbbls/d.

Supply forecasts for 2015

According to the EIA’s February STEO (Short-Term Energy Outlook), total US crude oil production averaged 9.2 MMbbls/d in January. The EIA forecasts that output will increase further to average ~9.3 MMbbls/d in 2015. The EIA expects it to increase more to average ~9.5 MMbbls/d in 2016. For context, the output averaged ~8.67 MMbbls/d in 2014.

A strong crude supply level is bearish for crude prices—unless it’s met with parallel demand. In the next part of this series, we’ll analyze if demand-related factors balanced supply levels.

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