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Bear Market Trader | What drives oil prices? The balance of Oil inventories.
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What drives oil prices? The balance of Oil inventories.

Points to be taken from this read

 

Inven­to­ries act as the bal­anc­ing point between sup­ply and demand.

The rela­tion­ship between prices and inven­to­ries allows for effects in either direction. 

Some oil pro­duc­ing coun­tries pub­lish their inven­to­ry num­bers irreg­u­lar­ly, if at all. 

 

Disclaimer

Most of the infor­ma­tion here comes from the U.S. Ener­gy Infor­ma­tion Administration’s web­site (EIA) and some from Wikipedia. I am not pre­tend­ing to come up with all this infor­ma­tion myself. The only thing I did was go through the infor­ma­tion and put togeth­er pieces of it to make it eas­i­er to under­stand and access for myself. This, I want to share with you and I hope it ben­e­fits you in some way. All the praise goes to the good peo­ple that put this up on the EIA and Wikipedia website.

 

Please go over to these respec­tive web­sites for a lot more information:

 

EIA on the bal­ance of ‘What dri­ves Crude Oil’

https://www.eia.gov/finance/markets/crudeoil/balance.php

 

Keep­ing it simple

As I tried explain­ing in the dis­claimer this post is just going to be the sum­ma­riza­tion of ‘facts’ I have found on the inter­net. Sort of like a cheat sheet for any­thing on the bal­ance of crude oil. Above you can find the sources for the infor­ma­tion list­ed here so head on over and look up more details if you wish.

 

So here it goes…

 

How do oil prices get influ­enced by the balance?

 

Inven­to­ries

  • Inven­to­ries act as the bal­anc­ing point between sup­ply and demand. 
  • Dur­ing peri­ods when pro­duc­tion exceeds con­sump­tion, crude oil and petro­le­um prod­ucts can be stored for expect­ed future use. 
  • In the eco­nom­ic down­turn of late 2008 and ear­ly 2009, for exam­ple, the unex­pect­ed drop in world demand led to record crude oil inven­to­ries in the Unit­ed States and oth­er OECD countries. 
  • In con­trast, when con­sump­tion out­strips cur­rent pro­duc­tion, sup­plies can be sup­ple­ment­ed by draws on inven­to­ries to sat­is­fy the needs of consumers. 
  • Giv­en the uncer­tain­ty of sup­ply and demand, petro­le­um inven­to­ries are often seen as a pre­cau­tion­ary measure.

 

Refiner­ies and stor­age ter­mi­nals can store crude oil and/or fin­ished prod­ucts like motor gaso­line, heat­ing oil, and diesel to pre­pare for sea­son­al fluc­tu­a­tions, refin­ery main­te­nance, or unex­pect­ed weather. 

  • Some petro­le­um prod­ucts, such as heat­ing oil and gaso­line, have pro­nounced sea­son­al demand vari­ance; inven­to­ries rise when con­sump­tion is low­er and are drawn down when con­sump­tion increas­es. For this rea­son, inven­to­ry lev­els are most use­ful­ly assessed in rela­tion to pri­or year lev­els for the same cal­en­dar quarter.

 

Future expec­ta­tions

Because inven­to­ries can sat­is­fy either cur­rent or future demand, their lev­el is sen­si­tive to the rela­tion­ship between the cur­rent price of oil and expec­ta­tions of future prices. 

  • If mar­ket expec­ta­tions indi­cate a change toward rel­a­tive­ly stronger future demand or low­er future sup­ply, prices for futures con­tracts will tend to increase, encour­ag­ing inven­to­ry builds to sat­is­fy the oth­er­wise tight­en­ing future balance.
  • On the oth­er hand, a sharp loss of cur­rent pro­duc­tion or unex­pect­ed increase in cur­rent con­sump­tion will tend to push up spot prices rel­a­tive to futures prices and encour­age inven­to­ry draw downs to meet the cur­rent demand.

The rela­tion­ship between prices and inven­to­ries allows for effects in either direction. 

  • If futures prices rise rel­a­tive to the cur­rent spot lev­el, incen­tives to store oil (and wait to sell at the high­er expect­ed price) will strengthen. 
  • Con­verse­ly, if mar­ket par­tic­i­pants notice an increase in crude oil stor­age, this increase can indi­cate that cur­rent pro­duc­tion sur­pass­es cur­rent con­sump­tion at the pre­vail­ing price. 
    • Spot prices will like­ly drop to rebal­ance demand and supply. 
    • This bal­anc­ing between cur­rent and future prices and between sup­ply and demand through inven­to­ries is one of the main con­nec­tions between finan­cial mar­ket par­tic­i­pants and com­mer­cial com­pa­nies with a phys­i­cal inter­est in oil, both of whom engage in futures trading. 
    • Phys­i­cal inven­to­ry lev­els and price spreads over time act as sig­nals between cur­rent mar­ket par­tic­i­pants and those with longer-term exposures.

 

Pub­li­ca­tions

The U.S. Ener­gy Infor­ma­tion Admin­is­tra­tion pub­lish­es week­ly, month­ly, and annu­al inven­to­ry sta­tis­tics for crude oil and its relat­ed products. 

Indus­tri­al­ized coun­tries that belong to the Orga­ni­za­tion of Eco­nom­ic Coop­er­a­tion and Devel­op­ment (OECD) coun­tries usu­al­ly pub­lish inven­to­ry sta­tis­tics on a reg­u­lar basis.

 

Real num­bers not always available

How­ev­er, inven­to­ry data for oth­er countries—including key devel­op­ing coun­tries with rapid­ly grow­ing oil con­sump­tion as well as major pro­duc­ing countries—is some­times avail­able on a less time­ly basis, or in some cas­es, not avail­able at all. 

  • In addi­tion, oil is often stored on ships at sea. 
  • The lack of com­plete infor­ma­tion on inven­to­ries cre­ates addi­tion­al uncer­tain­ty in oil mar­kets, which can also influ­ence oil prices.
  • Final­ly, in addi­tion to the com­mer­cial inven­to­ries dis­cussed above, the Unit­ed States and oth­er coun­tries main­tain strate­gic reserves of oil. The U.S. Strate­gic Petro­le­um Reserve, which is main­tained by the Depart­ment of Ener­gy, cur­rent­ly holds almost 700 mil­lion bar­rels of oil that can be drawn upon by order of the Pres­i­dent in the event of a sup­ply dis­rup­tion that meets spe­cif­ic statu­to­ry criteria. 
  • Mem­bers of the Inter­na­tion­al Ener­gy Agency, includ­ing the Unit­ed States, col­lec­tive­ly hold about 1.6 bil­lion bar­rels of pub­li­cal­ly-owned petro­le­um stocks for emer­gency response.

 

Thanks for reading

 

I hope this post helps to make the rela­tions between OECD mem­bers and non-OECD coun­tries more clear in terms of the demand of the world’s oil and thus oil prices.

If you like what I’m doing here please leave a quick com­ment. It will be much appre­ci­at­ed. Trolls are still wel­come as well. And sub­scribe to my newslet­ter if you like. 

 

T3chAddict
t3chaddict@bearmarkettrader.com

Day trader. Tech geek. Sim racer/Pilot.

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