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A Small Fall in Inventories Could Be a Big Push for Oil Prices

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Nov. 20 2020, Updated 2:35 p.m. ET

Oil inventories and their five-year average

In the week ended January 11, US crude oil inventories were 8% higher than their five-year average—the same as the previous week. Oil prices and the inventories spread usually move inversely. If the inventory spread expands more into positive territory, it could drag oil prices down in future weeks. The inventory spread is the difference between oil inventories and their five-year average.

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Oil prices, energy stocks, and the inventory spread

Since the EIA (U.S. Energy Information Administration) released its inventory data on January 16, US crude oil March futures have risen just 0.8%. Between January 16 and 22, oil-weighted stocks Hess (HES) and ConocoPhillips (COP) rose 1.2% and 0.1%, respectively, while Occidental Petroleum (OXY) was unchanged. Inventories may have limited oil’s upside.

Since January 16, the S&P 500 (SPY) and Dow Jones Industrial Average (DIA) have risen 0.6% and 0.8%, respectively. These indexes’ energy components are sensitive to oil prices.

Changes in inventory levels

Tomorrow, the EIA is scheduled to announce last week’s US crude oil inventory data. A rise of ~1 MMbbls (million barrels) could narrow the inventory spread. A Reuters poll suggests crude oil inventories fell 0.27 MMbbls. If the EIA data aligns with the Reuters poll, the inventories spread could contract by one percentage point and boost oil prices.

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