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Must-know: Why a larger oil inventory draw helped boost oil prices

Ingrid Pan, CFA

Oil inventory figures reflect supply and demand dynamics and affect prices

Every week, the U.S. Department of Energy (or DOE) reports figures on crude inventories, or the amount of crude oil stored in facilities across the U.S. Market participants pay attention to these figures because they can indicate supply and demand trends. If the increase in crude inventories is more than expected, it implies either greater supply or weaker demand and is bearish for crude oil prices. If the increase in crude inventories is less than expected, it implies either weaker supply or greater demand and is bullish for crude oil prices. Crude oil prices highly affect earnings for major oil producers like Oasis Petroleum (OAS), Hess Corp. (HES), Chevron (CVX), and Exxon Mobil (XOM).

Larger-than-expected inventory draw: Positive for oil prices

On December 4, the DOE reported a decrease in crude inventories of 5.6 million barrels compared to analysts’ expectations of a crude oil inventory draw of 90,000 barrels. The larger-than-expected decrease in inventories was a positive signal for oil prices.

Oil prices rose on the day. WTI crude prices closed at $97.20 per barrel compared to $96.04 per barrel the day prior.

Background: U.S. crude oil production has pushed up inventories over the past few years

From a longer-term perspective, crude inventories are much higher than they were in the past five years at the same point in the year (though they had closed in under comparable 2012 levels for a period earlier this year). There has been a surge in U.S. crude oil production over the past several years. Inventories had accrued because much of the excess refinery and takeaway capacity had been soaked up, and it took time and capital for more to come online. This caused the spread between WTI Cushing (the benchmark U.S. crude, which represents light sweet crude priced at the storage hub of Cushing, Oklahoma) and Brent crude (the benchmark international crude, which represents light sweet crude priced in the North Sea) to blow out.

However, over the course of 2013, this closed in considerably, so that the two benchmarks traded almost in line again, as more takeaway capacity from the Cushing hub came online. Recently, however, the spread has widened back out (see WTI-Brent spread neared $20 per barrel as US oil surge continues for more background).

Outlook

This week’s larger-than-expected draw in U.S. inventories was a positive short-term indicator for WTI crude prices, and it pushed crude prices higher. WTI price movements and broader oil price movements affect crude oil producers, as higher prices result in higher margins and earnings. Names with portfolios slanted towards oil, like Oasis Petroleum (OAS), Hess Corp. (HES), Chevron Corp. (CVX), and Exxon Mobil (XOM), could see margins squeezed in a lower oil price environment. Also, oil price movements affect energy sector ETFs like the Energy Select Sector SPDR Fund (XLE), which includes companies that develop and produce hydrocarbons as well as companies that service them.

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