EIA & API Crude Oil Inventories Report: An Introduction

Followers of oil-related news may be familiar with the weekly-release of US oil inventory data. There are two different releases each week, one on a Tuesday evening (UK time 21:30) by the industry-backed American Petroleum Institute (API) and the other on Wednesday afternoon (UK time 15:30) by the government Energy Information Administration (EIA), with the latter often being viewed as the main market mover. In this post I’ll be discussing the importance of these data releases and how they affect the market.

Oil, like all commodities, is fundamentally driven by economic laws of supply and demand. Inventory data is therefore important as it provides an indication of the net position of supply minus demand and can be tracked over time. If inventories are falling over time then it is likely that either demand is increasing or supply is decreasing, and hence the price of oil is likely to increase. Tracking inventories over time also gives an indication of the extent of effects caused by one-off supply or demand disruptions. For instance if inventories have held at a steady level but then supply is disrupted by severe weather,  inventory data will give market participants an indication of the extent of the disruptions to the oil supply chain.

The EIA release can be found here. While the overall stock of crude oil is the headline number reported in inventory releases, the EIA release also provides a breakdown which covers everything from refinery usage through to imports, exports, consumption and supply for a number of different petroleum products. Because of this breakdown the EIA release does not only directly affect crude prices but also futures prices of other fuels such as gasoline.

Which report is better?

Both industry-surveys are conducted in a similar manner, but the EIA survey is government mandated while the API survey is voluntary. The EIA report will be the most useful for non-institutional investors looking for a full breakdown report as it is free to access. While the EIA report is often considered the main market mover, the API report still moves the market as it gives an early indication of what the EIA numbers are likely to be. However the surveys do often come up with different numbers, and an interesting article from the FT gives a short analysis of the differences. For interesting readers, energy commentator Geoffrey Styles posted an interesting article here about how the reports could be improved.

How does the market react to the releases?

Energy market news before the EIA release will often quote that oil is up or down based on a combination of the earlier API release and a consensus view of forecasters. A good example is this Bloomberg article from December 19^th that discusses how oil gained when the API figures showed an inventory fall of three times more than the forecasted amount (-4.1 million vs consensus of -1.75 million). Momentum from this early release will often then build throughout the morning in anticipation of the EIA report. Normally the EIA should still move the market, and in theory in a similar way to the API report; if the release shows inventories fell by more than consensus momentum may continue and the oil price will rise further. Interestingly on December 19^th the EIA report actually showed inventories dropped by 1 million barrels, a whole 3.1 million barrels less than the API report and 0.75 million less than the consensus view. Despite this, oil still saw strong positive pressure and increased by more than a dollar in 30 minutes of trading, as the chart below shows. This could be that traders simply saw the later release as confirmation that WTI inventories were at least beginning to fall, given the supply glut discussed in my previous article “The WTI-Brent Spread: narrowing in the New Year?”.

How to profit from the inventory report?

There are a number of ways in which investors can profit from the inventory reports. Clearly as the graph above shows, both the API and EIA numbers can generate strong market momentum if they deviate from the consensus view. One way to profit from the report is using short-term trades to capture the positive or negative momentum created from the deviation from consensus. If inventories actually increase more than expected it is likely oil wall fall for a short-time period after the release, and possibly for the rest of the day, and vice-versa. To test this theory, I will be providing a weekly update on release on the inventory figures to see how the markets reacted for the rest of the day after the trade – please check the “Oil inventory report analysis” section on the right for more.

Lastly the inventory number will also influence other securities such as equities and FX. A post explaining how and why this happens will be provided in the coming weeks.