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Higher Inventories Might Help Oil Prices Rise

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US crude oil inventory data

In the week ending March 30, 2018, US crude oil inventories fell by 4.6 MMbbls (million barrels) to ~425.3 MMbbls. The market expected a rise by 1.4 MMbbls in the EIA’s data on April 4, 2018. On the same day, US crude oil May futures fell 0.2%. Rising US crude oil production, which we discussed in the previous part, could be behind the fall.

In the week ending March 30, 2018, US crude oil inventories were 2.5% less than their five-year average—a bullish factor for oil prices. The difference is called the “inventories spread.” Oil prices and the inventories spread usually move inversely, as you can see in the above graph. In the week ending March 23, 2018, the inventories spread was at -1.5%.

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Inventories spread and oil prices

Since the EIA data were released on April 4, 2018, US crude oil prices have risen 0.1% to date. Factors like rising US crude oil production and bearishness in the equity markets could have limited oil’s upside during this period.

On April 4–9, 2018, oil-weighted stocks Concho Resources (CXO), Occidental Petroleum (OXY), and Denbury Resources (DNR) had returns of -5.5%, 3.5%, and 4.8%, respectively.

The iShares Global Energy ETF (IXC) and the iShares US Energy ETF (IYE) have risen 1.1% and 0.4% since April 4, 2018.

Oil prices could gain more

On April 11, 2018, the EIA must report a rise of less than ~3.7 MMbbls in US crude oil inventories for the week ending April 6, 2018. Any rise below this level will likely help the inventories spread expand more into the negative zone. The average rise in US crude oil inventories in the last five years was ~3.76 MMbbls for this time of the year. A surprise fall in US crude oil inventories would be bullish for oil prices.

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