How Do Oil Inventories Drive Crude Prices?
Which inventories (US, OECD, global, crude, products?) and which prices (spot, futures, spreads?) matter, specifically?
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Given confusion around how crude prices have fallen alongside plummeting SPR-inclusive inventories (when an inverse relationship is typically expected), this analysis aims to establish a better understanding of the relationship between oil inventories and crude prices.
To do so, we must establish which inventories and which prices truly matter.
On the inventory side, we must exclude stocks that behave fundamentally differently when compared to commercial inventories (i.e., strategic reserves); furthermore, we can broaden the standard OECD commercial inventory data to include non-OECD countries, where demand is typically growing faster, which bolsters the relationship between prices and inventories.
On the price side, the prompt futures contract flattens both the level of the futures curve and the prevailing curve shape into a single number; separating these factors adds texture to understanding the relationship between prices and inventories over time and reveals the different ways that inventories drive different portions of the futures curve.
We’ve all seen the charts of plummeting US crude stocks (if you include the SPR) that have, since mid-2022, fallen alongside prices, which gave up virtually all their annual gains by the end of the year. But it would be logical for prices to be heading higher when inventories are heading lower, and vice versa. So, is the market wrong? What is the relationship between oil inventories and crude prices?
Part of the challenge in answering this question is that there are many different stockpiles of crude oil and refined products around the globe, held for a variety of operational, speculative, and strategic purposes. This post has been a long time coming—and it is particularly relevant given ongoing discussions around the US Strategic Petroleum Reserve (SPR). Here, I will pull together some of my thoughts on the oil futures curve and observable global petroleum stocks in the hopes of dispelling some confusion and to provide some context as to where prices stand today given underlying inventory levels.