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Why inventory figures for crude and refined products were bullish

Ingrid Pan, CFA

How inventory figures affected crude prices (Part 1 of 2)

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, as 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 such as Oasis Petroleum (OAS), Hess Corp. (HES), Chevron (CVX), and Exxon Mobil (XOM).

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

On December 27, the DOE reported a decrease in crude inventories of 4.73 million barrels compared to analysts’ expectations of a crude oil inventory draw of 1.92 million barrels. The larger-than-expected decrease in inventories was a positive signal for oil prices. Plus, figures for gasoline and distillates, the refined products of crude oil, also showed bullish demand. Gasoline inventories decreased 0.61 million barrels, compared to estimates of an increase of 0.95 million barrels. Distillates decreased 1.85 million barrels compared to estimates of a decrease of 0.67 million barrels. Oil traded up on the day, closing at $100.32 per barrel, compared to the prior day’s close of $99.55 per barrel.

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

From a longer-term perspective, crude inventories for most of this year are much higher than they were in the past five years at the same point in the year (though they have closed in under comparable 2012 levels for periods). 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 Why the WTI-Brent spread might close in soon for more analysis).


This week’s larger-than-expected draw in U.S. crude oil inventories was a positive short-term indicator for WTI crude prices. 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 such as 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 such as the Energy Select Sector SPDR Fund (XLE), an ETF that includes companies that develop and produce hydrocarbons and the companies that service them.

Continue to Part 2

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