Despite Market Signals, Oil Inventories Are In Line With Previous Levels

One of the biggest determinants of oil prices is the economic law of supply and demand.  This seems self-explanatory.  After all, in general, the more scarce a commodity is relative to the number of people and businesses that want to buy that commodity, then the more expensive that commodity will be as there will be a greater number of dollars chasing the same amount of the given commodity.  In the case of oil, one of the best sources of information that market participants can use to measure the supply and demand balance is the Petroleum Status Report which is released every week by the United States Energy Information Administration.  This article is the first in a weekly series, which will be exclusive to Talk Markets, that will track the trends in the oil market fundamentals and hopefully assist investors in making decisions with oil-related investments.

At the end of the week ending October 17, 2014, the Energy Information Administration reported that U.S. commercial crude inventories contained 377.7 million barrels of crude oil, an increase of 7.1 million barrels from the previous week.  This triggered a sell off in the market that reduced the price of crude oil in the futures market as well as prompting a sell off in the stock market of oil-related stocks.  However, it is interesting to note that oil inventories were actually at a higher level last year even though oil prices were also much higher.

Source: United States Energy Information Administration

Oil inventories in the United States have been steadily climbing since the beginning of October, which partly explains the decline in oil prices over the last month.  However, despite this, oil inventories overall were still lower than last year which could be evidence that the so-called glut is not as bad as some market commentators have been saying.

Source: United States Energy Information Administration

Despite the steady rise in oil stockpiles, the country’s gasoline inventories have been steadily declining over the past month.  As with oil inventories, gasoline inventories are also broadly lower than last year.

Source: United States Energy Information Administration

Despite the lower stockpiles of gasoline, prices of gasoline have also been trending downward, due likely to the decline in oil prices.

Interestingly, this decline in gasoline inventories comes even as the amount of crude oil going into refineries and refinery utilization are broadly higher than during the equivalent period last year.  However, the amount of crude oil going into refineries has been steadily declining over the past month.

The fact that gasoline inventories are broadly lower over the past year yet refinery inputs are overall higher leads us to conclude that demand for gasoline, either domestically or abroad, has increased over the past year.  The surge in petroleum product exports over the same period, from 1.46 million barrels per day to 2.2 million barrels per day supports the conclusion that international demand has indeed increased over the year.

The conclusion that we are forced to draw from this is that there has been no sufficient increase in the supply of oil in the United States that can account for the tremendous declines in the price of WTI futures.