Fall in Oil Inventories Might Ease Oil’s Decline

US crude oil inventory data

According to the EIA’s (U.S. Energy Information Administration) report released on May 31, US crude oil inventories fell by ~3.6 MMbbls (million barrels) to ~434.5 MMbbls in the week ending May 25. The market expected a fall of 0.6 MMbbls based on an S&P Global Platts survey. On May 31, US crude oil July futures fell 1.7%. As we discussed in Part 1, other bearish factors caused the drop in crude oil prices despite bullish headline inventory data.

Fall in Oil Inventories Might Ease Oil’s Decline

In the week ending May 25, US crude oil inventories were 0.5% lower than the five-year average. The previous week, the inventories were 0.4% lower than the five-year average. The difference is called the “inventories spread.” Oil prices and the inventories spread usually move inversely, as shown in the above graph. Although the negative inventories spread expanded marginally in the week to May 25, it has narrowed in the last few weeks, which is a bearish factor for oil.

In the week ending April 20, the inventories spread was at -3.5%—the lowest since 2011. Since April 20, US crude oil active futures have fallen 5.3%.

Inventories spread, oil prices, and energy stocks

Since the EIA data were released on May 31, US crude oil July futures have fallen 3.4%. On May 31–June 4, Callon Petroleum (CPE), RSP Permian (RSPP), and Diamondback Energy (FANG) fell 13.1%, 7.7%, and 7.5%, respectively—the largest losses on our list of oil-weighted stocks.

Since May 31, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares US Oil & Gas Exploration & Production ETF (IEO) have fallen ~2.6% and 0.6%.

Lower inventory levels might support oil prices

A fall of more than ~0.3 MMbbls in US crude oil inventories in the week ending June 1 could help the inventories spread expand more into the negative zone. A larger fall of more than 2.3 MMbbls could push the inventories spread below -1%, which might help slow down oil’s fall.

The EIA is scheduled to announce the US crude oil inventory data on June 6. In the past five years, US crude oil inventories have fallen by an average of ~0.36 MMbbls at this time of the year.