uploads/2016/05/Crude-oil-Inventories-and-Crude-Oil-Futures1.jpg

What’s the Correlation between Crude Oil Inventories and Prices?

By

Updated

Last week’s data

US commercial crude oil (USO) (UWTI) (SCO) (UCO) (BNO) inventories rose by 2.8 million barrels compared to the previous week. Inventories were at 543.4 million barrels for the week ended April 29, 2016. US  crude oil inventories are at historically high levels, according to data released by the EIA (U.S. Energy Information Administration) on May 4, 2016. The EIA will release inventory data for the week ended May 6 on Wednesday, May 11.

Article continues below advertisement

Correlation of crude oil inventories and prices

Between September 2007 and June 2011, crude oil futures rose. During this period, the four-week correlation between crude oil inventories and prices was negative. The negative correlation clearly indicates that a drop in inventory levels broadly drives a rise in crude oil futures, and vice versa.

However, between March 2011 and September 2014, the correlation was more bi-directional. So, other factors like excess liquidity and data missing market expectations could be other important factors driving prices, apart from simple demand-supply dynamics in the oil market. Between September 2014 and March 2016, the correlation was negative. During this period, crude oil was in a downturn, which was an indication of how rising inventories have been helping push crude oil prices lower.

Currently, the correlation in the four weeks to May 4, 2016, is at 27%, and crude oil inventories are at historical highs. Over this period, crude oil moved upward despite rising inventories. The reason could be that inventory figures have already been discounted in crude oil prices. The above analysis could be important for oil-weighted stocks such as Concho Resources (CXO), Halcon Resources (HK), Synergy Resources (SYRG), and Kosmos Energy (KOS).

Advertisement

More From Market Realist