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Why oil prices sank despite seemingly positive inventory figures

Ingrid Pan, CFA

Why oil and gas traded contrary to inventory data (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 should have been positive for oil… but why wasn’t it?

On January 3, the DOE reported a decrease in crude inventories of 7.00 million barrels compared to analysts’ expectations of a crude oil inventory draw of 2.29 million barrels. Larger-than-expected decreases in inventories generally drive oil prices higher, as they would indicate either more demand or less supply than expected. However, this week, distillate stocks increased by 5.04 million barrels, compared to analysts’ expectations of a rise of 481,000 barrels. Distillates represent a refined product of crude oil, and the large build compared to expectations could signal that less crude will be needed at refineries to produce distillate. Also, accounting specificities having to do with how much crude refineries hold at year end may have affected the crude inventories number, and consequently markets may have ignored the large downward swing in inventories. Oil finished lower on the day despite the large crude inventory draw. WTI crude closed at $93.96 per barrel, compared to the prior day’s close of $95.44 per barrel.

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

From a longer-term perspective, for most of 2013, crude inventories were much higher than they were in the past five years at the same point in the year (though they closed in under comparable 2012 levels at points throughout the 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 Why the WTI-Brent oil spread might narrow in 2014 for more analysis).


This week’s larger-than-expected draw in U.S. crude oil inventories would normally be a positive short-term indicator for WTI crude prices, but traders shrugged off the figure due to year-end accounting idiosyncrasies and a large build in distillates (a product of refined crude oil).

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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