Spread Betting Oil: How To Trade Oil Inventories

Crude oil is undoubtedly the king of commodities. It is the most traded nonfinancial commodity in the world today, and it supplies 40% of the world’s total energy needs. If you need a refresher on the ‘Black Gold’, Mr FT has you covered - introduction to oil, how to trade oil, OPEC and oil and finally, the US Dollar and oil. In this piece, I’m going to look at yet another influence on oil prices, the weekly US oil inventories report.

A Glimpse Into Future Demand
If you trade oil you really can’t afford to miss this. The US oil inventory figures are issued by the Energy Information Administration (EIA) every Wednesday afternoon at 15:30 (released Thursday at 15:30 if there was a US bank holiday on Monday). The report includes a summary of crude oil supply, consumer consumption, and production and refinery utilisation. Above all else though, the most important figure is the headline change in inventory stocks.

Traders love this figure because it impacts the price of oil in a relatively predictable way. If the change in inventories is positive then there’s more oil in inventory and less demand for it. In this case the price of oil tends to fall. On the other side, when inventories are falling, demand is up and the price of oil tends to rise.

If you want to keep up with your oil inventories jargon, when inventories fall, that is known as a ‘draw’ and when they rise, its referred to as a ‘build’.

Despite being a US release, it’s a signal for the global demand of oil and directly affects the price of both US Crude Oil and Brent Crude Oil. Hyperlinked is the latest report which is quite comprehensive. You can also check our Live Trading Calendar for what the change in stocks figure came in at.

Expected Vs Actual
Leading up to the oil inventories release, market analysts will give their view on what the change in inventories figure will be. The average expectation of all these different market analysts becomes the market consensus figure and this expectation gets built into the price of oil. So let’s say that analysts expect that inventories will fall by four million from the previous week. In this case, all else equal, the price of oil should go up leading up to the release. You can check our Live Trading Calendar each week for what the market consensus is.

When the actual change in inventories number is released, it is the deviation from the expected number that is really important. If the actual inventories figure shows a two million decline when a four million decline was expected, then that is actually negative for the price of oil. All else equal, oil’s price should fall after the release.

How To Trade Oil Inventories
For me, there are two main ways to trade the number. First up, you could try to forecast it yourself. Analysts are often notoriously wrong with their estimates, so you could have a go and see if you can do any better. If the change in inventories figure you come up with is less than the market consensus, then you should go long oil. If it’s greater than the estimate, then you should short oil. This method would require you to open a position a couple of hours before the release and then reassess when the actual change in stocks is announced. One disadvantage is that a lot of research is required if you’re going to constantly beat the market.

The second method is simpler and requires that you wait until the report is actually released. Compare the actual inventories change figure with the market consensus, have a quick look at the immediate market reaction and then make a trade. So let’s say that the fall in stocks was greater than expected. You note on the paddypowertrader charts that the price of oil is starting to move up in response. This method would require that you go long and hope that the upward movement continues. On quiet news days, the report can stimulate the oil market for the rest of the day.

American Petroleum Institute Oil Inventory Report
A day before the Energy Information Administration (EIA) releases its latest figures, the American Petroleum Institute (API) gives us their own report. This is usually out Tuesday evening at 21:30. To make up its report, the API collects information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The difference is that the US government demands that reports be filed with the EIA for its weekly survey. The change in oil inventories from the API and EIA have moved in the same direction 76% of the time over the past four years, a pretty decent correlation. So if you’re looking to get a head start on the EIA Change in Inventories, keep an eye on the API Change, which will also be updated in the Weekly Calendar.

Don’t Trade The Number In A Vacuum
While the oil inventories number is great if you’re looking for a bit of action on the oil markets, remember not to trade it in a vacuum. Some weeks, there are other dominating factors out there that are driving the price of oil. If there’s a hurricane lurking around the Gulf of Mexico or increased instability around the Middle East, updates on those stories will have a greater influence on oil’s price. So it’s worth keeping an eye out for the general news headlines before the release at 15:30.

Oil Volatility
Oil, by its very nature, is a volatile commodity because of what the geographical regions comes from and what impacts its manufacture and refinement i.e. the weather. The volatility is worth keeping in mind as oil prices can often whiplash upon the release of the inventories figures. However knowing that there may be some volatility every Wednesday at 15:30 should keep traders looking for price movement happy.

Oil Stocks To Watch
Outside of the commodity itself, the inventories number is also important for oil companies. A falling number is a good sign for oil companies and will typically have a positive impact on their share price because they tend to make more money when demand is high and oil prices are up. On the flip side, a rising figure is a bad sign.

By market cap, the largest company in the US (Exxon Mobil (XOM) - $349.5B), UK (Royal Dutch Shell (RDS-A) - £99.2B) and Eurozone (Total (TOT) - €93.9B) are all oil companies. Other goliaths to keep an eye on include Chevron, PetroChina and BP. These companies are so big that when their share price moves, their respective indices move too. For example, despite the FTSE 100 (^FTSE) being made up of, you guessed it, 100 companies, just two, Royal Dutch Shell and BP, make up over 19% of it. When they move, the FTSE moves.

Influence On FX Markets
Despite oil inventories being a US indicator, it has a large affect on the Canadian Dollar (CAD) because of their sizable energy sector. The US imports the majority of its oil from Canada, so a lower than expected inventories number will often be positive for CAD. In this case, USD/CAD would fall. Also watch out for movement on EUR/CAD and other countries currencies that have natural reserves of oil.

Subscribe by RSS Subscribe by Email

Comment by Kelly Granite Enck

2009-10-21 07:43:24

Oil trader..please keep me updated
Thanks for the amazing tip!!

Reply to this comment

 

Comment by Mark

2009-10-21 08:27:11

Trying to jump on the bandwagon once the cat is out of the bag is usually a disaster, unless the deviation from expectations is massive (over 4K at least). Also, need to consider discrepancies with Unleaded and heating oil. Unless you can spike trade and are faster than Speedy Gonzales, then stay out until a decent retracement has occurred. GT

Reply to this comment