uploads///Crude Oil Prices and Inventory Spread

Why Could Oil Inventories Pressure Crude Oil Prices?

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Last week’s crude oil inventory data

US commercial crude oil inventories rose by about 1.4 MMbbls (million barrels) for the week ending July 29, 2016—compared to the previous week. Inventories were at 522.54 MMbbls for the week ending July 29, 2016, according to data released by the EIA (U.S. Energy Information Administration) on August 3, 2016.

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Inventory spread and crude oil

The spread between crude oil inventories and their five-year average has widened consistently since January 2015 after it broke four-year highs and hit record levels. During this period, crude oil prices (USO) (UWTI) (SCO) (UCO) (BNO) were falling. So, the relationship between crude oil inventories and crude oil prices is inverse, as the above graph shows. Crude oil prices bottomed out in early 2016. Crude oil inventories seem to have topped out at that time as well.

US crude oil and petroleum product inventories (excluding strategic petroleum reserves) were ~1,389.7 MMbbls—historic high levels for the week ending July 29. Since July 1, 2016, US crude oil and petroleum product inventories had been making new historic highs. This contributed to weakness in crude oil prices in the past month.

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Seasonality

However, a seasonal study of gasoline inventories indicates that inventories usually start to fall in August. If this happens this year as well, it could support oil prices. The gasoline inventory fell by 3.3 MMbbls for the week ending on July 29, 2016. Now, the US total motor gasoline inventory is about 10.9% above its five-year average.

It will be interesting to see the impact of the EIA’s inventory data for the week ending August 5, 2016. The data will be released on August 10, 2016.

Impact on stocks and ETFs

Of course, crude oil inventory levels, which have exceeded their historical averages, are important for oil-weighted stocks like Concho Resources (CXO), Bill Barrett (BBG), Northern Oil & Gas (NOG), Oasis Petroleum (OAS), Abraxas Petroleum (AXAS), Halcon Resources (HK), Synergy Resources (SYRG), and Kosmos Energy (KOS).

Crude oil sentiments also impact ETFs like the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the Energy Select Sector SPDR ETF (XLE), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), and the ProShares UltraShort Bloomberg Crude Oil (SCO).

In the next part, we’ll analyze the relationship between crude oil and the US Dollar Index (UUP).

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