US Crude Oil Could Hit a New 3.5-Year High

US crude oil inventory data

According to the EIA’s (U.S. Energy Information Administration) report released on June 27, US crude oil inventories fell by ~9.9 MMbbls (million barrels) to ~416.6 MMbbls in the week ending June 22. The market expected a fall of ~2.3 MMbbls based on an S&P Global Platts survey. On June 27, US crude oil August futures rose 3.2%.

US Crude Oil Could Hit a New 3.5-Year High

In the week ending June 22, US crude oil inventories were 4% below their five-year average. In the previous week, the inventories were 2% 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 chart. The expansion in the negative inventories spread in the week ending June 22 was a bullish factor for oil prices.

Inventories spread, oil prices, and energy stocks

Since the release of the EIA’s data on June 27, US crude oil August futures have risen 1.6%. On June 27–July 2, California Resources (CRC), Diamondback Energy (FANG), and WPX Energy’s (WPX) returns were 0.3%, -0.6%, and -1.8%, respectively—the outperformers on our list of oil-weighted stocks. The remaining oil-weighted stocks on our list closed in the red during this period.

Since June 27, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares US Oil & Gas Exploration & Production ETF (IEO) have fallen ~1.9% and ~1.3%, respectively. These ETFs hold energy stocks.

Fall in inventory levels that could add more upside to oil

A fall by more than ~6.1 MMbbls in US crude oil inventories in the week ending June 29 could help the inventories spread expand more into the negative territory—a factor that could add more upside to US crude oil prices.

The EIA is scheduled to announce its US crude oil inventory data for the week ending June 29 on July 5. In the past five years, US crude oil inventories have fallen by an average of ~6.3 MMbbls at this time of the year.