Oil Inventory Spread: Could Oil’s Upward Journey Continue?

Crude oil inventory data

Based on EIA (U.S. Energy Information Administration) data released on May 17, 2017, US commercial crude oil inventories fell ~1.8 MMbbls (million barrels) during the week ended May 12, 2017, to ~520.8 MMbbls.

Oil Inventory Spread: Could Oil’s Upward Journey Continue?

In the week ended May 12, 2017, crude oil inventories were ~110.3 MMbbls more their five-year average. Between February 24 and March 3, 2017, the inventory spread was 159.5 MMbbls, the highest level seen since January 2011. Oil prices are inversely related to oil inventories, as you can see in the graph above.

The inventories spread started to widen in January 2015. After that, it broke four-year highs and hit record levels. During the same period, crude oil prices (USO) (USL) (UCO) (BNO) fell. Crude oil prices bottomed out in early 2016 as inventories topped out. This inverse relationship occurred on a smaller scale in subsequent months.

Recent relationship

In the week ended May 5, 2017, the inventory spread was ~112.8 MMbbls. However, it fell to ~110.3 MMbbls in the week ended May 12, 2017. The fall could point to a tightening of the demand-supply balance. If this pattern continues, it could impact oil prices positively. However, as we discussed in the first part, we’ll also have to look at what’s happening with US crude oil production.

The impact of inventory data

Remember, crude oil’s price movements are important for oil-weighted stocks. Earlier, we discussed how the oil inventory spread can impact crude oil prices. So, a fall in the inventory spread could support the energy stocks in your portfolio.

The impact of the inventory spread on energy stocks could also impact broader market indexes such as the S&P 500 (SPY) (IVV) (SPX-INDEX) and the Dow Jones Industrial Average (DIA) (DJIA-INDEX). Energy companies form 6.6% of the S&P 500 and 6.4% of the Dow Jones.

Crude oil is crucial for the following energy ETFs:

  • 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)
  • the ProShares UltraShort Bloomberg Crude Oil ETF (SCO)