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Analyzing the Impact of Surging Crude Oil Inventories

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Jan. 28 2016, Updated 12:31 p.m. ET

Crude oil inventories are up

In its weekly Petroleum Status Report released on Wednesday, January 27, 2016, the EIA (U.S. Energy Information Administration) reported that US crude oil inventories rose by 8.4 MMbbls (million barrels) to settle at 494.9 MMbbls for the week ended January 22, 2016. Analysts were expecting a rise of 3.5 MMbbls for that week. The current crude oil inventory levels were 21.6% higher than during the same period last year.

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The impact of higher-than-expected rises in crude oil inventories

The actual rise in crude oil inventories was more than two times what analysts predicted. Analysts expected a rise in crude oil inventories because refinery inputs are continuously falling as we head into summer refinery maintenance season, and massive stockpiles of distillates and gasoline are also forcing crude oil inventories to rise. The analyst expectations were under the actual figures because analysts projected that colder temperatures would boost heating oil demand as well as crude oil demand. The crude oil inventory builds in the last weeks resulted mainly from the fall in the crude oil demand and not from the changes in production levels, which we’ll analyze in detail in later parts of this series.

A higher-than-expected rise in crude oil inventories is bearish for crude oil prices (USO), and a fall in crude oil prices will reduce the profitability for crude oil producers such as Occidental Petroleum (OXY), Anadarko Petroleum (APC), Marathon Oil (MRO), and Apache (APA). A smaller rise in crude oil inventories will benefit oil tankers like DHT Holdings (DHT) and Nordic American Tankers (NAT).

The EIA’s estimates and projections

The EIA estimated that global crude oil inventories will rise for the second consecutive year. The inventories rose by 1.9 MMbpd in 2015 and are also projected to rise by 0.7 MMbpd in 2016. A decline in inventory levels is expected to balance the crude oil markets in 2017. The EIA also expects a decline in US crude oil inventories.

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