One Piece at a Time - U.S. Crude Oil Supply/Demand Balances, Inventories and Pricing

Last week, crude oil prices dropped below $50/bbl, in part due to continued increases in U.S. crude oil inventories, and fell further over the next few days. Then yesterday, prices perked up by $1.14 to $48.86/bbl; again one of the factors was the weekly inventory number from the Energy Information Administration which showed inventories down by a fraction of a percentage point for the week. The market seems to react spontaneously to changes in that crude-stocks statistic. Up is bearish, down is bullish. These days even a very modest decline in inventories is bullish. But serious analysis requires a more detailed, more nuanced understanding of why crude oil inventories behave as they do. Were inventories driven up by higher production or lower refinery runs? By higher imports? By lower exports? The reasons behind the inventory change are more important than the change itself. Today we continue our series on the modeling of U.S. crude oil supply and demand, and the sourcing of input data used in those calculations.

The focus of this blog series is on the growing significance of the U.S. supply/demand balance in the Shale Era, and on the data that’s available to assess it on a regular basis. In Part 1, we discussed the relationship between crude oil prices and the U.S. supply/demand balance, focusing on 1) the degree to which the two are out of balance and 2) the direction supply and demand are headed in relation to each other (closer to balance or further apart). Only by keeping a sharp eye on the ever-changing relationship between crude supply and crude consumption—and by anticipating shifts in that relationship—can oil traders and others whose daily success or failure depends on crude pricing trends make informed decisions.

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Inventory levels are key. Every barrel of oil that is either produced within the U.S. or imported into the country needs to go somewhere—to a U.S. refinery, to an export terminal for shipment overseas, or into storage. Refineries and exports take the crude out of circulation—that oil is gone, as far as the U.S. crude market is concerned. Inventories are different—they are the market “balancer”, and as a result crude storage levels are always on the market’s mind. The inventory build-up that EIA reported last week (an 8.2-MMbbl increase to a record 528.4 MMbbl in storage—not counting what’s in the Strategic Petroleum Reserve) set off alarm bells—in part because EIA also said that domestic crude production was up for the third week in a row (to 9.09 MMb/d) and probably headed higher later this year and in 2018—and oil prices (which had traded largely within a narrow $53-to-$56/bbl range for three solid months) were suddenly south of $50/bbl.

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