Why a drop in US crude inventories boosted oil prices

Kshitija Bhandaru

A key guide to crude oil and natural gas inventories (Part 2 of 4)

(Continued from Part 1)

The EIA’s crude and refined product inventory data

On July 23, the U.S. Energy Information Administration (or EIA) released crude and refined product inventory data for the week ending July 18. Crude oil inventories decreased by 4 million barrels, compared to analysts’ expectations of a 2.9 million barrel decline. This was the fourth consecutive week that supplies were down.

The decline in supplies is attributed to sustained demand from refineries. Demand from refineries is running at record levels, near 16.8 million barrels per day, for the last couple of weeks. See graph below. The EIA reported that U.S. refiners operated at 93.8% of capacity in the week ending July 18, the same capacity as the week before.

Gasoline, a major refined crude product, saw an increase in inventories of about 3.4 million barrels, as opposed to an estimated increase of 1 million barrels. This could either mean that demand for gasoline was less than anticipated or that refineries supplied more gasoline for the week than needed.

Distillates are another important product of refining that are used for transportation and industrial needs. Distillate inventories increased by 1.6 million barrels, compared to an estimated increase of 2 million barrels. This could either mean that analysts underestimated demand from consumers or that analysts overestimated the supply of distillates from refineries, or both.

A positive signal

Meanwhile, crude oil inventories at Cushing decreased by 1.45 million barrels to 18.8 million barrels, the lowest levels since November 2008. This is a positive signal for West Texas Intermediate (or WTI) crude. WTI crude typically trades higher when supply levels at its pricing and delivery point are low.

Falling crude inventories, which indicates high demand, especially at Cushing prompted WTI prices to trade higher at $103.12 per barrel on July 23. The day prior, WTI prices were $102.39 per barrel.

Oil prices

Oil prices were also supported by several other factors such as China’s strong economic growth, the U.S. government’s tougher sanctions on Russia, and the fears of increasing tension in the Gaza Strip.

Higher oil prices support the margins of oil-weighted companies such as Oasis Petroleum Inc. (OAS), Hess Corporation (HES), Chevron Corporation (CVX), and Exxon Mobil Corporation (XOM). Most of these companies are components of the Energy Select Sector SPDR Fund (XLE).

The following parts of the series will cover changes in natural gas inventory levels and natural gas prices.

Continue to Part 3

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