What Change in Inventory Might Be Bearish for Oil Prices?

US crude oil inventory data

According to the EIA’s (U.S. Energy Information Administration) report on July 11, US crude oil inventories fell ~12.6 MMbbls (million barrels) to ~405.2 MMbbls in the week that ended on July 6.

The market had expected a fall of just 4.8 MMbbls, according to S&P Global Platts. However, US crude oil August futures plunged 5% on July 11 due to trade war concerns.

What Change in Inventory Might Be Bearish for Oil Prices?

In the week that ended on July 6, US crude oil inventories were 4% below their five-year average. In the previous week, 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 we can see in the chart above. If the negative inventories spread keeps expanding into negative territory as inventories fall, it could support oil prices in the weeks ahead.

Inventories spread, oil prices, and energy stocks

Since the release of the EIA data on July 11, US crude oil August futures have fallen 3.3%. The factors we discussed in Part One could be behind the fall in oil prices, although the negative difference between US crude oil inventories and their five-year average has doubled on a week-over-week basis.

Between July 11 and July 16, oil-weighted stocks Whiting Petroleum (WLL), Carrizo Oil & Gas (CRZO), and WPX Energy (WPX) fell 6.4%, 4.5%, and 0.4%, respectively. The fall in oil prices could drag energy stocks.

Since July 11, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares US Oil & Gas Exploration & Production ETF (IEO) have returned -2.2% and 1%, respectively. These ETFs hold energy stocks.

Fall in inventory levels

A fall of more than ~4.9 MMbbls in US crude oil inventories in the week that ended on July 13 could help the inventories spread expand more into the negative territory. However, if inventories don’t fall as much or the data show a buildup in inventory levels, US crude oil prices could continue their downturn.

On July 18, the EIA is scheduled to announce its US crude oil inventory data for the week that ended on July 13. In the past five years, US crude oil inventories have fallen by an average of ~5.2 MMbbls at this time of the year.