Today sees the release of the EIA (Energy Information Administration) weekly crude oil inventories report. This report tracks the weekly change in the number of barrels of crude oil held as stockpiles by US oil companies. Supply and demand have a significant impact on oil prices, so the level of available inventories has a major impact on the price of crude and refined products at the pumps but also affect inflation. Inflation rates tend to correlate with oil prices. As oil prices move down or up, inflation rates tend to go in the same direction.
This direct relationship was most apparent in the 1970s when oil prices went from sub-$3 barrels before the oil crisis in 1973 to over $40 barrels during the oil crisis of 1979, doubling the CPI (Consumer Price Index – a key measure of inflation) in the process.
While the relationship between oil prices and inflation rates isn’t as severe as in the 70s, the correlation still exists, albeit in a more mild form.
So how exactly does the EIA inventory report impact prices?
If the increase in crude oil stockpiles is higher than forecast, this will imply weakening demand and increased supply. The result would be declining oil prices (Bearish sentiment). The same holds true if an expected decline is lower than anticipated. Either case would point to more available stocks which tend to result in lower prices.
On the other hand, if the actual increase in inventories is lower than expected (or the decline is more than forecast) then this points to diminishing supply which tends to result in higher prices for crude (Bullish sentiment).
EIA inventory reports tend to have more impact on the prices for WTI crude (West Texas Intermediate).
The oil industry in the US has been through some hard times recently, particularly with the recent hurricanes and storms which forced extensive plant closures and severely impacted supply chains. While this mainly affected the supply and price of refined products at the pumps, there has been an uptick in production to make up for the outages.
Supply is the driver for the market and anything that negatively impacts supply is a good thing for oil prices. This uptick in production after the weather events in the US affects market projections for the EIA report, with an increase of 2.29 million barrels forecast, compared to 4.59 million barrels last time around.
The supply factors aren’t limited to local factors in the US markets. WTI already saw a price hike yesterday as international benchmark pricing rose on the back of favorable supply news. Brent crude climbed to over $59 a barrel the highest level since July 2015. This price hike was purely supply driven as OPEC supply cuts continue to bite into global stockpiles and concerns about supply to the Turkish port of Ceyhan start to impact the markets.