A less-than-expected increase
On March 11, the EIA (US Energy Information Administration) reported that crude inventories rose significantly yet again, increasing by 4.5 million barrels (or MMbbls) in the week ending March 6.
While the build resulted in record high inventory figures, they still came in below analysts’ expectations. Analysts had expected a 4.75 MMbbl increase.
The total US commercial crude inventory now stands at ~449 MMbbls, setting another all-time high record. Inventories surpassed their previous high record of ~444 MMbbls set last week.
Changes in inventories drive WTI (West Texas Intermediate) prices, which impacts the profitability for companies that produce oil, like Hess (HES), ExxonMobil (XOM), and Marathon Oil (MRO). These companies make up 19% of the Energy Select Sector SPDR ETF (XLE) and ~3.4% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Supply-related factors caused crude inventories to build
For the past few weeks, inventory movement has been driven by strong crude oil production. Output touched ~9.3 million barrels per day (or Mmbpd) in the week ending February 27. For this week, output almost touched 9.4 Mmbpd, increasing 42,000 bpd (barrels per day) over the prior week’s levels. At these levels, output levels are at their highest level in weekly data since 1983.
An increase in imports has also caused the surge in inventories over the past few weeks. Last week, however, imports decreased 575,000 bpd to ~6.8 Mmbpd last week. This curbed the inventory build to an extent.
Supply forecasts for 2015
According to the EIA’s March STEO (Short-Term Energy Outlook), total US crude oil production averaged 9.4 Mmbpd in February. The EIA forecasts that output will average ~9.3 Mmbpd in 2015, and increase further in 2016 to average ~9.5 Mmbpd. These levels would be close to the record high US production levels of 9.6 Mmbpd in 1970.
To put this into context, output averaged ~8.67 Mmbpd 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.