Crude oil inventories
In its weekly “Petroleum Status Report” released on Wednesday, August 12, the EIA (U.S. Energy Information Administration) reported a decrease of 1.7 million barrels (or MMbbls) in crude oil inventories for the week ended August 7.
Analysts were expecting a slightly larger decrease of 2 MMbbls.
What this means
When inventories decrease less than expected, they’re usually bearish for crude oil prices. This is negative for major oil producers such as Hess Corporation (HES), EP Energy (EPE), Diamondback Energy (FANG), and Occidental Petroleum (OXY). HES, FANG, and OXY are components of the iShares U.S. Energy ETF (IYE). They make up ~5% of the fund. Plus, lower prices may discourage these upstream companies from producing more crude oil, which would mean lower volumes transmitted by MLPs like Plains All American Pipeline Partners (PAA). This, in turn, would lower their revenues. In the week ended August 7, while inventories did fall (bullish), they fell less than expected (bearish). Follow us through this series to know how the EIA report affected WTI overall.
Background on crude oil inventories
After touching a peak of 490.9 million barrels in the week ended April 24, inventories began turning downward for the first time in four months in the week ended May 1, as you can see in the graph above.
Until the week ended June 26, inventories consistently decreased—by a cumulative ~28 MMbbls—sparking speculation that the supply glut was easing. Since then, however, inventories have seesawed. Recently, inventories have declined three weeks in a row and are currently at ~453.6 million barrels.
Whether the change in the course of crude oil inventories will continue in the coming weeks remains to be seen. Production is one of the key things to watch here. We’ll discuss production in the next part of this series.
Importance of crude oil and inventories
Crude oil is one of the most important energy sources for the world. Its refined products have several applications, ranging from powering cars to building roads. Crude oil prices are important not only for individuals but also for the world’s economies and industries. Supply and demand trends determine crude oil price trends. You can easily gauge these trends based on trends in crude oil inventory levels.