US Oil Inventories

Crude oil is the most traded non-financial commodity in the world and supplies 40% of the world’s energy needs. Today I’m going to take a look at the US oil inventories report which is the premier announcement of the week and one that oil traders across the globe look at closely. 

Future Demand

The US oil inventory figures are issued by the Energy Information Administration (EIA) every Wednesday afternoon at 15.30 (or Thursday at 16.00 if there was a US bank holiday on the Monday). The figures include a summary of crude oil supply, consumer consumption and refinery utilisation but the most important figure is the headline change in inventory stocks. Despite being a US release, it gives oil traders the best idea of global demand for oil and directly affects the price of both US Crude Oil and Brent Crude Oil which is traded in Europe. 

This figure is usually the one that impacts the price of oil in a relatively predictable way. If the change in inventories is positive this means that there is more oil in storage and so less pressure on demand in which case the price of oil tends to fall. If, on the other hand, the figures show that inventories have fallen, this could put pressure on supply so the price of oil tends to rise. 

Expected Vs Actual

Market analysts and economists will give their view on what the change in inventories figures will be before the release. The average value of these views will form the market consensus and will be built into the price of oil before the announcement. 

When the report is released and the actual change in inventories is known, it is the deviation from the expected number that is built into the price that causes the price to change. So if the actual inventories figure shows a two million decline when a 5 million decline was expected, then this would be negative for the price of oil as the inventories haven’t declined by as much as was priced into the market and so the supply pressure is not a great as thought. If the actual figure is very different from the expected figure then this is likely to cause a greater price movement than if the figures are similar. The price of oil can get extremely volatile around the time of the release so caution must be taken when trading at this time. 

How I Trade The Announcement 

I will sit down at my trading desk around 14.30 with a cup of coffee nearby and get the 10min, 1hr and 1day charts up of Brent Crude Oil to see if technical analysis of these charts can offer any hints as the where the announcement might take the price. A clear trend or previous day reversal candle are examples of when this might help. Then I will form an opinion on trader sentiment towards crude oil over the last week and over the last couple of days by looking at these charts and from a selection of news sources and comments. I then write down the expected figures and wait for the announcement to come. If the sentiment towards oil is good and the inventory numbers surprise to the downside I will buy confidently. If the sentiment is good but the inventory numbers surprise to the upside I will wait for a possible spike downwards and look to buy after it’s reversed or settled down a little. Vice versa for if sentiment is bad towards oil. This is obviously a simplification of my actions and my actions for any particular week will be unique to the situation but it gives an insight nonetheless.

Other Effects

As well as affecting the price of oil itself, the inventories number is also important for oil companies. Higher demand for oil generally means more profit for oil companies and vice versa. Some oil companies are extremely large companies and when their share price moves, their respective stock indices move too. For example, the FTSE100 is made up of 100 companies yet just two, Royal Dutch Shell and BP, make up over 10% of the market capitalisation which is something to bear in mind.