Another Related Article Crude prices fell fast and hard Wednesday after the U.S. Department of Energy announced a large increase in both oil and gasoline inventories, defying expectations of significant declines. The report threw a wrench in an inventory outlook that was looking increasingly constructive for a rally in oil prices.
The consensus analyst guess was that U.S oil inventories would decline by 3.1 million barrels for the week but, instead, 3.3 million barrels were added to storage. Gasoline results were no more conducive to energy investor gains as inventories climbed 3.3 million barrels instead of the 275,000 barrel decline analysts had forecast.
The data sent the West Texas intermediate crude price from an overnight high of $48.40 (U.S.) a barrel to $45.95 shortly after the report, and it slipped further to $45.72 by the end of the day.
The first accompanying chart shows that U.S. crude inventory levels were set for the first year-over-year decline since 2014, an event that would likely have pushed the commodity price significantly higher. The average monthly crude inventory level had been climbing quickly - from 2014's 343 million barrels to 2016's 490 million barrels - but in 2017 the amount of stored oil was rising much more slowly.
At the end of May, the 509.9 million barrels in inventory was a mere 5.7 million barrels higher than the previous year.
The recent change in trend for gasoline inventories could explain this week's apparent decline in crude demand. It's easy to forget that all crude demand comes from refiners - consumers have no use for crude oil, only distillates such as gasoline and (indirectly) for jet fuel. A rise in distillate inventories implies slower growth in refiner oil demand in the future, so gasoline inventories and the oil price tend to move in opposite directions.
The lower chart highlights the possibility that the positive (for investors, not consumers looking to pay less at the pump) trend in gasoline inventories may be reversing, threatening oil demand from refiners. In July of 2016, the year-over-year increase in stored gasoline was a sizable 11.8 per cent. From there, inventory growth slowed sharply, bottoming in March, 2017, with a year-over-year decline of 2 per cent that suggested healthy gasoline demand.
The year-over-year change in gasoline storage has been roughly flat in recent weeks and Wednesday's data indicate a small build of 0.3 per cent.
For investors in the energy sector, this week's numbers were terrible, but it's only one week. The overall trend in oil inventory growth remains constructive and reasonable investors can continue to expect year-over-year inventory draws in the latter half of 2017 that will support the commodity price. The path of gasoline inventories can help track whether this trend in crude inventories will remain in place.
Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market online. Subscribe to Globe Unlimited at globeandmail.com/globeunlimited.
Wed, 7 Jun 2017 18:00 EDT