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Why US crude oil inventories saw their biggest 1-week build

Ingrid Pan, CFA

The latest inventory reports affected oil and natural gas prices (Part 2 of 2)

(Continued from Part 1)

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).

Crude prices rose despite a larger-than-expected build in inventories

On April 16, the DOE reported the inventories data for crude for the week ended April 11. Crude oil inventories increased by 10.01 million barrels—well above the 1.24 million barrel rise analysts anticipated. This was the biggest one-week build for U.S. crude inventories in 13 years. Gasoline, a major product of refined crude, experienced a smaller-than-expected drop in inventories last week. The DOE reported a drop of 0.15 million barrels in gasoline inventories—smaller than analysts’ expectation of a 1.56 million barrel decline. Distillate, another major refined product of crude oil, experienced a slightly greater-than-expected drop in inventories. The reported data showed that last week, distillate inventories decreased by 1.28 million barrels, compared to analysts’ expectation of a build of 0.30 million barrels. Generally, a greater-than-expected build in crude or refined products storage hurts prices, as it indicates either weaker demand or stronger supply than expected. As a result, last week’s inventory figures seem to hurt crude prices.

Crude prices hit six-week highs on the day ahead of the releasing of inventories data. The rise was partly because the market showed great concern on oil supply due to the continuous tension in Ukraine. Both WTI and Brent hit a six-week high that time. WTI traded up to $104.73 per barrel, while Brent traded up to $110.24 per barrel. After the release of the latest inventories figures, however, WTI crude prices dropped and closed at $103.76 per barrel, compared to $103.75 per barrel the previous day.

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. Crude oil inventories can have a marked effect on oil prices, and so they can be an important indicator to monitor for people investing in energy companies—particularly upstream names with a high proportion of oil production.

To learn more about investing in the energy and power space, see the Market Realist series Strong oil activity continues to drive higher US oil rig counts. For other important analysis, see Market Realist’s Energy & Power page.

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