Why a Change in Inventory Could Make Oil Bulls Happy

US crude oil inventory data

According to the EIA’s (U.S. Energy Information Administration) report on July 18, US crude oil inventories rose by ~5.8 MMbbls (million barrels) to ~411.1 MMbbls in the week that ended on July 13. The market had expected a fall of 3 MMbbls, according to S&P Global Platts.

However, despite the surprise build in headline oil inventory data, US crude oil September futures rose ~0.9% on July 18 due to other bullish factors.

Why a Change in Inventory Could Make Oil Bulls Happy

In the week that ended on July 13, US crude oil inventories closed 2% below their five-year average. In the previous week, inventories closed 4% lower than the five-year average. This 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 contracting as inventories rise, it could drag on oil prices in the weeks ahead.

Inventories spread, oil prices, and energy stocks

Since the release of the EIA data on July 18, US crude oil September futures rose just 0.2%.

Between July 18 and July 23, oil-weighted stocks Oasis Petroleum (OAS), Callon Petroleum Company (CPE), and California Resources Corporation (CRC) rose 1.1%, 1.1%, and 2%, respectively, and outperformed their peers.

Since July 18, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares US Oil & Gas Exploration & Production ETF (IEO) have fallen 0.4% and 0.3%, respectively. These ETFs hold energy stocks.

Fall in inventory levels

A fall of more than ~1.9 MMbbls in US crude oil inventories in the week that ended on July 20 could help the inventories spread expand more into the negative territory—a factor that could make oil bulls happy. However, if inventories don’t fall as much or the data show a buildup in inventory levels, US crude oil prices could edge lower.

On July 25, the EIA is scheduled to announce its US crude oil inventory data for the week that ended on July 20. In the past five years, US crude oil inventories have fallen by an average of ~1.9 MMbbls at this time of the year. A Reuters survey has indicated a fall of 3.2 MMbbls in oil inventories in the week that ended on July 20.