Why energy company investors should watch crude inventory levels

Market Realist

Crude oil swings to 6-month lows and natural gas is unpredictable (Part 1 of 7)

Crude inventory levels

The U.S. Energy Information Administration (or EIA) reports figures on crude inventories on a weekly basis. The report also provides data on inventories of distillate and gasoline, which are refined products of crude oil.

The markets monitor these figures because inventory data indicates supply and demand trends. If the increase in crude inventories is more than expected, it implies either greater supply or weaker demand than anticipated. A more-than-expected increase in crude inventories pulls crude prices lower. However, if the increase in crude inventories is less than expected, it implies either weaker supply or greater demand than anticipated, which in turn pushes crude prices up.

Crude oil prices directly affect earnings for major oil producers such as Conoco Phillips (COP), Continental Resources (CLR), EOG Resources (EOG), and Pioneer Natural Resources (PXD)—all of which are major components of energy exchange-traded funds (or ETFs), such as the Energy Select Sector SPDR (XLE).

Cushing inventories

Another important figure reported by the EIA is the level of crude oil inventories at Cushing, Oklahoma—a major inland oil hub in the U.S. and the pricing point for the North American “benchmark,” West Texas Intermediate (or WTI) crude.

Inventory levels at Cushing reflect the rate at which the increasing U.S. oil supply is moving from major inland production areas such as the Bakken in North Dakota and the Permian in west Texas to end refining markets.

A build-up of inventories at Cushing may indicate that the oil supply growth is outpacing the takeaway infrastructure growth. Therefore, a build-up of inventories at Cushing can pressure the price of WTI crude downwards and vice versa.

The next section discusses the changes in inventory and oil prices last week.

 

Continue to Part 2

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