Oil prices, as well as the balance of supply and demand in the crude oil market, is influenced by oil inventories. One of the fundamental concepts of economics is the relationship between supply and demand. Similar to a lot of commodities – given the same level of demand – the more abundant the supply is, the lower its price on the market. The supply-demand relationship is no more clear than comparing how oil inventories impact the market.
Prices and Oil Inventories
If there is one word that best describes the price of crude oil, it is dynamic. For some products, it may take some time for their prices to balance as the market reacts to shifts in supply and demand. But in the case of oil, the price changes can be instantaneous. Traders might question the oil demand at the current price when inventories go up, and may immediately cause a price retreat by selling their assets.
On the other hand, the decline of oil inventories signals that the demand for the commodity is increasing, and traders may bid up prices when they buy back into the market.
Inventories of the EIA
The U.S. Energy Information Administration gives a weekly update on inventories. This big market-driving data details how oil stocks in the U.S. have changed in the prior week. Here, analysts also provide projections on adjustments in inventory. If the analysts’ estimates differ from EIA’s reports, oil prices may react drastically.
The number of stocks at the Cushing, OK delivery hub is another important component of the EIA’s data. Crude oil is transported from production areas across America, stored in Cushing, Oklahoma, then delivered to end refining markets. The inventory at Cushing is a good indicator of the pace at which the oil supply in the U.S. is being transported from production areas to end refining markets. If there is an inventory build-up, there might be more oil being supplied than can be transported for refining. The prices of the major North American benchmark known as the West Texas Intermediate, are set in Cushing.
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The Effect of Supply on the Economy
The supply and demand for oil change in unison with prices. A price increase indicates that sellers are keen on producing more oil at the current price than consumers’ demand. In principle, to boost demand, suppliers should decrease the price to determine if more purchasers will come to market at the lower price point. A decrease in the supply would mean that there is enough interest from purchasers at that price point. In this instance, there may be ample room for sellers to increase their prices.
Oil inventories give an insight into the level of supply in the market. Simply put, the amount of supply impacts prices. Following the EIA’s weekly inventory report, oil prices can change if they vary greatly from the expectations of analysts. Another crucial factor to consider is the total stockpile levels, since weekly adjustments in the inventory are dependent on the total stockpile level. If there is a big weekly draw on inventories and stockpiles are low, prices could increase. If weekly inventories continue to rise, and if total stockpiles are indicative of a well-supplied market, oil prices could decrease.
The energy trends worldwide have made it clear that the oil and gas industry continues to flourish, and that its production and energy demands will continue to increase. For approved and qualified investors interested in potential energy investments in Texas, fill out DW Energy’s contact form here.
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Sources:
“The Role of Inventories and Speculative Trading in the Global Market for Crude Oil,” Wiley Online Library, https://onlinelibrary.wiley.com/doi/abs/10.1002/jae.2322
“Weekly Petroleum Status Report,” U.S. Energy Information Administration, https://www.eia.gov/petroleum/supply/weekly/
“The Importance of Cushing, Oklahoma,” CME Group, https://www.cmegroup.com/education/courses/introduction-to-crude-oil/the-importance-of-cushing-oklahoma.html#