The oil market is the single and one of the most important commodity markets as oil is the basic energy resource used every day by millions of consumers across the world. Oil is used for a variety of purposes, which includes supplying energy to run the power industries, providing energy to heat homes, and providing fuel for all the modes of transportation, whether it is a car or airplane.
Apart from the primary usage, oil refined products are used for production in different chemical products such as detergents, paints, fertilizers, and plastics. Due to its extensive application and usage, the oil industry contributes considerably to the economy of the country and also the reason why oil prices are directly related to the financial balance and rise or fall of economic growth of a country.
The price of oil impacts all the global economies and also influences all the other industries that rely on the supply and demand of oil. The rise or fall of oil prices impacts the financial transactions and investment decisions. As the oil prices move up and down, so does the inflation rate. The drop in crude oil prices may be an advantage for consumers as they can spend money on other items while it is a loss for investors and oil producers. Likewise, a rise in oil prices may be profitable for investors and oil producers and distributors but a loss for consumers.
The constant changes in demand and supply of oil lead to volatility, and traders track any upward or downward price movements that can impact economic health and growth for both importing and exporting countries.
Crude oil and Brent oil is a naturally occurring nonrenewable energy resource that is extracted from the earth and then refined into numerous products for consumption such as gasoline, diesel, kerosene, and jet fuel. Crude oil is a major commodity that is traded globally as spot oil and also through derivative contracts. The price of oil depends on production costs, consumption levels, inventory levels, and regulating authority OPEC (Organization of Petroleum Exporting Countries).
The crude oil stockpiles are called ‘Oil Inventory,’ which refers to the reservoir or reserve of unrefined oil that is measured in a number of barrels. The oil producers and governments use oil inventory to balance out the impact of fluctuations in the supply and demand of oil. The inventory levels are influenced by global events, political events, tax policy, and, most importantly, the production decision taken by OPEC committee.
Effect of Inventory Levels on Economy
The oil inventory levels directly impact the price of oil, and the price is determined through the concept of supply and demand, which is one of the most fundamental concepts in economics. The higher inventory level means more supply as compared to demand that results in low oil prices, while lower inventory levels signify less supply as compared to demand that leads to high oil prices.
The governments maintain the excess supply of oil and hold it in reserve, when supply keeps on adding the oil prices decline and when supply is constantly used, the oil prices increase. The oil prices are quite dynamic, and the slight changes in supply and demand can have instant effects on the commodity market. For example, when the oil inventory level goes up, the traders may quickly sell their positions before the current price of oil drops. Likewise, when inventory level declines, it is a signal that demand will increase, so a trader might buy positions and then bid the prices.
Oil Inventory Report
The Energy Information Agency (EIA) releases a report on U.S crude stockpile or inventory every Wednesday at 10:30 A.M Eastern Time. The report is based on the non-emergency oil reserves that are available for commercial use. The data for strategic stockpiles is published separately by EIA that shows the oil inventory levels in case of any national emergency. The EIA report shows how the value of U.S oil stocks have changed as compared to the previous week.
The analyst provides projections on inventory adjustments prior to the release of the EIA report. If the EIA number is higher than expected, it means an increase supply strength and decrease in both demand and oil prices. Similarly, if the EIA number is lower than expected, it shows low supply and an increase in both demand and oil prices.
Apart from the United States of America, the International Energy Agency (IEA) also publishes the report on the oil inventory in OECD (Organization of Economic Cooperation and Development), which comprises 34 countries. The oil inventory represents stockpiles that can be used commercially and not part of Global Strategic Petroleum Reserves (GSPR) that shows inventory held by the OCED members in times of oil crisis.
The Considerations for Traders
The traders can take advantage of the weekly inventory reports, but they can also study global politics and the policies set by OPEC, which controls 60% of the world’s oil market. The OPEC committee meets regularly and decides on the oil prices and production quotas. The policy defined by OPEC significantly impacts the supply and demand of oil on a global scale.
The traders also need to consider other important factors such as political scenario, global events, refinery outages, and ongoing season as supply and demand of oil shifts during summer and winter months. To trade in the oil market, the traders must have clear understanding on
- The crude oil refining process
- The current political situation in oil producing countries
- The EIA and IEA inventory reports
The oil inventory report is one of the fundamental events that impacts the overall economy of the country and also influences other financial markets. The price of oil depends on both the supply and demand levels. The weekly oil inventory report is crucial as it updates and informs the traders on the total stockpile levels.
The oil prices also have an immediate effect on the market, and a slight difference from EIA report and analysts’ expectations can make the oil prices rise or fall. If the oil inventory is low and the demand for oil is increasing, then the oil prices may rise steeply. Likewise, if oil inventory is high and the demand is also low, then the oil prices will most probably fall considerably.
The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.
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