Will Oil Continue Its Upside After EIA Data?

In the week ending on July 12, US crude oil inventories were 4% higher than their five-year average—the same as the previous week based on the EIA’s (U.S. Energy Information Administration) inventory data. Oil prices and the inventories spread usually move inversely. If the inventories spread contracts, oil prices could continue to rise. The inventories spread represents the difference between US crude oil inventories and their five-year average.

Will Oil Continue Its Upside After EIA Data?

Oil prices and energy stocks

Since the EIA released its inventory data on July 17, US crude oil September futures have fallen 1.2%. On July 17–22, oil-weighted stocks California Resources (CRC), Carrizo Oil & Gas (CRZO), and Callon Petroleum (CPE) fell 3.7%, 2.4%, and 1.7%, respectively. They were the underperformers. California Resources, Carrizo Oil & Gas, and Callon Petroleum operate with a production mix of 74.4%, 81.7%, and 77.1% in commodities linked to oil prices. The change in the inventories spread will likely be important for these energy stocks.

On Monday, US or WTI crude oil prices rose 0.8% and settled at $56.22 per barrel. Rising tension between Iran and the West pushed oil higher and helped recover last week’s losses. In a new development, Britain asked its European Union allies to launch a naval mission to safeguard the passage of oil tankers through the Strait of Hormuz. The S&P 500 Index (SPY) will likely be impacted by rising geopolitical tensions. Energy stocks account for 5% of SPY.

Required change in EIA data

At 10:30 AM ET on Wednesday, the EIA is scheduled to announce last week’s US crude oil inventory data. A fall of equal to or more than ~7.3 MMbbls (million barrels) could help the inventories spread contract. However, analysts expect a fall of 1.4 MMbbls. If the EIA’s figure is in line with analysts’ expectations, the inventories spread will rise by one percentage point—a concern for oil prices. Unchanged inventories due to a smaller decline than required might not help the recent rise in the oil market. In fact, a fall less than 7.3 MMbbls but greater than 1.4 MMbbls will keep the inventories spread unchanged. A broader market index like SPY will likely be impacted by any change in US crude oil inventories.