Weekly Inventory Analysis: EIA release of 4th January 2013

How did EIA inventories affect Crude prices this week?

This is the first weekly inventory analysis post, which will look at the effect of the industry-backed API and government-backed EIA oil inventory reports and how they've affected WTI and Brent oil prices. For background information on these releases, check my previous blog post EIA & API Crude Oil Inventories Report: An Introduction.

Both releases were two days late last week due to the New Year, with the API release coming late on Thursday night and the EIA release coming at 4:00pm GMT on Friday. This meant the releases coincided with what is considered one of the most important macroeconomic indicators of the month: US non-farm payrolls. This indicator, which details the change on employment and the unemployment rate in the world’s largest economy, is often considered a good forecast for future demand potential. For a more detailed description check this brief description at Investopedia. Because of the fact the non-farm payrolls and the EIA numbers were released on the same day, it is necessary to discuss the former first.

The non-farm payrolls number came in as positive, causing a rally in US stocks which are historically correlated with oil prices due to the fact that both have consumption as their main drivers. Hence on the non-farm payrolls release both WTI and Brent rallied for around an hour and a half, stabilizing shortly before the release of the EIA release.

The API release had reported a fall in inventories of -12 million barrels. This was significantly more than the consensus forecast of -1 million barrels from a Bloomberg survey. Hence market followers may have been surprised when the EIA release, which confirmed this large fall in inventories with   -11.1 million barrels, actually resulted in a bearish reaction from both grades.

Despite the high fall in inventories, articles such as this one from Reuters suggest the headline number may be severely biased to the downside due to accounting reasons. Essentially refiners reduce purchases in the last week of the year for tax purposes. This would likely have been coupled with cargoes being held off-shore, which could result in a larger than expected inventory increase this week or next as industry participants catch-up.

This technicality alone was not enough to cause the bearish sentiment, rather the EIA breakdown contained a number of indicators that implied demand had significantly weakened in the last week of the year; negative news for both grades. Firstly, consumption of gasoline had fallen significantly and secondly stocks of both gasoline and distillates had continued their upward trends and surpassed consensus expectations, with gasoline stocks now having risen for 6 consecutive weeks.

While WTI remained buoyed for the remainder of the day by US employment numbers, Brent faced more negative news in the form of import data. Net imports for the last week of the year fell to their lowest point since February 1996, as the first chart below shows. Even worse for imported Brent grades, the second chart shows US net imports as a % of total petroleum products supplied to the domestic market reached the lowest proportion since 1991, and even on a 4 week moving average both charts show clear accelerations of negative trends since the second half of the year, implying US infrastructure for shifting the recent boom of domestically produced WTI is indeed improving at an accelerating rate (For more detail see The WTI-Brent Spread: Narrowing in the New Year? ).

Overall the inventory results this week, in particular the fact that a large fall in inventories was coupled with a quick fall in both WTI and Brent prices, demonstrates the lesson that as always the key is in the detail. Hence, while some traders might hope to profit immediately on the news, it is always better to check the numbers in more detail or at least to wait for price trends to develop. This thought process is clear in the 1-minute graphs below (WTI is on top). Both show immediate rises on the 4:00pm mark which are soon reversed before more declines come about 10 minutes later as traders and analysts have time to form a real opinion and market sentiment forms. This sentiment continues for around 30 minutes in each case before other factors come back in to play.

Watch out for the EIA release tomorrow which could show a rebound in inventories as refiners restock after the end-of-year destock seen last week. Given the technicality regarding the headline figure, sentiment will most likely form on whether the negative trends in gasoline and distillate stocks and demand have continued, which could enhance fears regarding current political fighting over the US debt ceiling which have already seen some securities pull-back.