The Oil Inventory Spread Is Falling, But Can Oil Prices Rebound?

Crude oil inventory data

US commercial crude oil inventories fell ~0.9 MMbbls (million barrels) during the week ended April 28, 2017, to ~527.8 MMbbls—near record levels, according to the EIA (US Energy Information Administration) data released on May 3, 2017.

The Oil Inventory Spread Is Falling, But Can Oil Prices Rebound?

The inventory spread and crude oil

For the week ended April 28, 2017, crude oil inventories were ~117.9 MMbbls above their five-year average. For the week ended March 3, 2017, the inventory spread was 159.5 MMbbls—its highest level since January 2011. Notably, the relationship between crude oil inventories and crude oil prices is inverse, as you can see in the graph above.

The spread between crude oil inventories and the five-year average started to widen in January 2015 after 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, while inventories topped out. This inverse relationship was also seen on a smaller scale in subsequent months.

Most recently

In the week ended April 21, 2017, the inventory spread was ~118.4 MMbbls. The fall in the spread to ~117.9 MMbbls in the week ended April 28, 2017, could point to a tightening of the demand-supply balance. If this trend continues, it could support crude oil prices. However, as we discussed in the first part, we’ll also have to look at what’s happening with refined product inventories.

It’ll be interesting to see the impact of the EIA report for the week ended May 5, 2017, which will be released on May 10, 2017. Analysts estimate a fall of 2 MMbbls in crude oil inventories for the week.

The impact of inventory data

Remember, crude oil’s price movements are important for oil-weighted stocks. The inventory spread can impact crude oil prices, and a fall in the inventory spread could have a positive impact on 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 Index (SPY) (IVV) (SPX-INDEX) and the Dow Jones Industrial Average (DIA) (DJIA-INDEX). Energy accounts for 6.6% of the S&P 500 Index and 6.4% of the Dow Jones Industrial Average.

Crude oil is also an important driver for energy ETFs such as 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 ETF (SCO).

In the next and final part of this series, we’ll examine the latest Brent-WTI (West Texas Intermediate) spread.