How far can crude oil prices fall? (Part 2 of 8)
Inventory data
On December 10, 2014, the U.S. Energy Information Administration, or EIA, released inventory data for the week ended December 5.
Much to the surprise of analysts, inventories increased by 1.5 million barrels, or MMbbls. Analysts were expecting inventories to decline by 2.7 MMbbls.
Total US commercial crude inventory now stands at 380.8 MMbbls. As the chart above shows, this remains at the higher end of the five-year range for this time of year.
Supply
Crude inventories showed strong gains throughout the refinery maintenance season that ended on October 31. Strong US production levels also ensured robust supply levels. Last week, US crude production increased by 35,000 bpd (or barrels per day) from the week earlier to 9.1MMbbls per day. These levels are ~1 MMbbls per day higher than they were a year ago. Production levels are at their highest in about 30 years.
In its December “Short-Term Energy Outlook,” or STEO, the EIA said that output will hit 9.3 MMbbls per day in 2015, less than the 9.4 MMbbls per day it had forecast in its November STEO, but still, the most since 1972. Also according to the STEO, total US crude oil production averaged an estimated 9.0 MMbbls per day in November.
Another factor contributing to an inventory build-up was higher imports. Total US imports increased by 365,000 bpd to 7.6 MMbbls per day.
Refinery demand
The main source of crude demand is from refineries. Refinery input levels affect inventory draws and builds. Increased crude input demand is bullish for oil prices. We’ll discuss this important side of the demand-supply equation in the next part of this series.
Changes in inventories drive WTI (West Texas Intermediate) prices, which in turn impact the profitability of oil producing companies such as Anadarko Petroleum Corporation (APC), Apache Corporation (APA), ExxonMobil Corporation (XOM), and Murphy Oil Corporation (MUR).
Many oil producing companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), so XOP’s fortunes are directly linked to crude oil price movements.
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