What Change in Inventories Could Support Oil’s Recovery?

US crude oil inventory data

According to the EIA’s (U.S. Energy Information Administration) report released on June 6, US crude oil inventories rose ~2.1 MMbbls (million barrels) to ~436.6 MMbbls in the week ended June 1. The market had expected a fall of ~2.0 MMbbls based on an S&P Global Platts survey. On June 6, US crude oil July futures fell 1.2%.

What Change in Inventories Could Support Oil’s Recovery?

In the week ended June 1, US crude oil inventories were just above their five-year average—a first since March 9. In the previous week, the inventories were 0.5% lower than the five-year average. This difference is called the inventories spread. Oil prices and the inventories spread usually move inversely, as shown in the chart above. The negative inventories spread turned positive in the week ended June 1, which is a bearish factor for oil prices.

In the week ended April 20, the inventories spread reached -3.5%—the lowest level since 2011. Since April 20, US crude oil active futures have fallen 3.3%.

Inventories spread, oil prices, and energy stocks

Since the release of the EIA data on June 6, US crude oil July futures have risen 2.1%. Between June 6 and June 11, Carrizo Oil & Gas (CRZO), California Resources Corporation (CRC), and WPX Energy (WPX) rose 10.5%, 7.1%, and 4.4%, respectively—the largest gainers on our list of oil-weighted stocks.

Since June 6, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares US Oil & Gas Exploration & Production ETF (IEO) have risen ~2.8% and ~2.0%, respectively. These ETFs hold energy stocks.

Lower inventory levels could support oil prices

A fall of ~2.2 MMbbls in US crude oil inventories in the week ended June 8 could help the inventories spread remain on par to the five-year average. A larger fall of more than 2.2 MMbbls is expected to push the inventories spread back into the negative zone, which could help oil’s recovery.

The EIA is scheduled to announce its US crude oil inventory data on June 13. In the past five years, US crude oil inventories have fallen by an average of ~2.2 MMbbls at this time of year.