Every week, the US Department of Energy (the DOE) reports figures on crude inventories, or the amount of crude oil stored in facilities across the US. Market participants pay attention to these figures, as they can indicate supply and demand trends. If the increase in crude inventories is more than expected, it implies either greater supply or weaker demand and is bearish for crude oil prices. If the increase in crude inventories is less than expected, it implies either weaker supply or greater demand and is bullish for crude oil prices.

The inventory build was much more than expected, sending oil prices down.

On October 23, the DOE reported an increase in crude oil inventories of 5.2 million barrels. In contrast, analysts actually expected a crude oil inventory build of 2.9 million barrels. The larger-than-expected increase in inventories was a negative signal for oil prices.

Consequently, WTI crude oil traded down on the day, closing at $96.86 per barrel. This was the lowest level for WTI crude since June.

Background: US crude oil production has pushed up inventories over the past few years.

From a longer-term perspective, crude inventories had been much higher than they were in the past five years at the same point in the year (though they’ve recently closed in under comparable 2012 levels). There’s been a surge in US crude oil production over the past several years and inventories had accrued because much of the excess refinery and takeaway capacity had been soaked up, and it took time and capital for more to come online. This caused the spread between WTI Cushing (the benchmark US crude, which represents light sweet crude priced at the storage hub of Cushing, Oklahoma) and Brent crude (the benchmark international crude, which represents light sweet crude priced in the North Sea) to blow out.

However, over the course of 2013, this closed in considerably. So the two benchmarks traded almost in line again, as more takeaway capacity from the Cushing hub came online. Recently, though, the spread has widened back out

My 2 cents:

Bottom line here is the building crude inventory is finally being looked at and wrote about. Its taken a long time, but the undeniable evidence of growing U.S. crude production is finally affecting the market.

Although we had a massive 5.2 build in crude from the previous week, what’s more impressive is the domestic crude production daily of 7.9 mbbls. up from 6.6 mbbls. same week ending last year, that’s a 20% increase and analysts are predicting that the U.S. can and will sur- pass the Saudi’s daily crude production by the end of 2015, which is currently just over 9.0 mbbls. per day.

Crude will certainly have a floor, and that floor will be dictated by the level where crude needs to be for do- mestic crude production to maintain a profit for the play- ers who are extracting it and selling it, some folks think that’s in the $65 to $70 dollar range, but who really knows?

Bill Braunig
Global Companies LLC