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Oil Inventories Could Make Investors Rethink Their Longs

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Last week’s crude oil inventory data

US commercial crude oil inventories fell ~0.6 MMbbls (million barrels) for the week ending September 9—compared to the previous week. Inventories were at 510.8 MMbbls for the week ending September 9, according to data released by the EIA (U.S. Energy Information Administration) on September 14, 2016.

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Inventory spread and crude oil

The spread between crude oil inventories and their five-year average 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. This inverse relationship was also seen in smaller magnitudes in the following months.

US crude oil and petroleum product inventories (excluding strategic petroleum reserves) were 1,396.9 MMbbls for the week ending September 9—7.7 MMbbls below its historic highs of 1,404.7 MMbbls for the week ending on August 26, 2016. Between July 1 and August 26, US crude oil and petroleum product inventories had been making historic highs. US crude oil futures have fallen 10.1% between July 1 and September 20, 2016.

It will be interesting to see the impact of the EIA’s report for the week ending September 16, 2016. The data will be released on September 21. A Bloomberg survey estimates a rise of 3.25 MMbbls in the crude oil inventory for the week ending on September 16, 2016.

Impact on ETFs

Crude oil inventory levels, that exceeded their historic averages, are important for 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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