Crude oil has risen by as much as 33% from its June lows. When analysing this market, we often come across readings made available by the EIA of changes in US crude inventories. The prevalence of the use of this economic indicator raises the question of its impact on oil prices.
What does the reading on changes in oil stocks tell us?
Total stocks of crude oil and petroleum products excluding strategic stocks (so-called SPR) is a term that refers to the total amount of crude oil and petroleum products in storage in the United States. The main components of this indicator include:
- The amount of crude oil available in storage and reservoirs that is not part of the strategic reserve (SPR). The reserve is a strategic petroleum resource maintained by the US government to respond to sudden disruptions in energy supply.
- In addition to crude oil, this indicator also takes into account the amount of various petroleum products such as gasoline, heating oil, diesel, liquefied natural gas (LNG) that are available in storage.
This reading is published every Wednesday and, at first glance, appears to affect crude oil prices, particularly Texas Intermediate WTI. It may appear that an increase in inventories means that there is excess supply on the market, which could lead to lower oil prices. Such surpluses must be kept in storage. Conversely, a fall in inventories may suggest a shortage, which usually results in higher oil prices, but is this really the case?
Source: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W
Do changes in oil stocks really say anything about the situation in this market?
It turns out that when we examine the correlation between the period of change to next week and the latest reading of the change in oil stocks, we get a correlation of -0.1. We can consider this result to be the result of pure statistical error. Perhaps it is the stock reading that is more dependent on the oil price change than vice versa? However, in this case too, we are not able to conclude any significant correlation, as the correlation is only -0.03. Deeper analysis allows us to see that the highest correlation is for the change 5 days after the publication of the results, with a correlation of -0.19. Such a situation is what the famous financial statistician Nassim Taleb calls 'fooled by randomness'.
Source: Conotoxia MT5, XTIUSD, Daily
Are the readings influencing increased volatility?
If we analyse volatility in order to answer the question of whether it creates opportunities for speculators, it is worth noting that volatility, measured as the average daily deviation from the average result (i.e. the standard deviation) shows significantly more volatility at the beginning of the week than after Wednesday, when the data are published (see table below). After the publication of the data, the oil market usually tends to calm down, meaning that we do not see a significant increase in volatility on the day the data are published. We can therefore conclude that, in the case of oil prices, these data are more of a curiosity for investors than a factor that determines decisions to buy or sell this commodity.
Understanding the data and the various market indicators is crucial in the investment process. Therefore, we should not allow ourselves to be misled by headlines or a lack of understanding of the data. Understanding which information is relevant in the information noise is particularly important in accurately interpreting what is happening in the market.
Source: Conotoxia own analysis
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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