Crude Oil Inventory – Introduction
Crude Oil futures are some of the most popular and liquid instruments available to day traders.
As one of our favorite markets to trade, our community looks forward to
the crude oil inventories release each week due to the wonderful opportunity it provides.
Our head trader George often mentions that you can make a full week’s income by trading only one hour a week on Wednesday.
In this article, we will help you understand the crude oil inventory release so that you can take advantage of the volatility it provides!
What is the Crude Oil Inventory Report?
The crude oil inventory report gives traders a glimpse into the balance of supply in the oil market.
The report is released by the US Energy Information Administration (EIA) every Wednesday at 10:30 am EST.
The crude oil inventory number is a threefold release that reports the number of barrels of crude oil that firms have in inventory. These firms report their inventory numbers to the EIA on a weekly basis. However the EIA must still make some estimates to arrive at the final number.
In addition to crude inventories, the EIA also reports gasoline inventories and Cushing storage levels.
Cushing, Oklahoma is the major inland hub in the US and sets the pricing point for WTI crude. Inventory levels here reflect the pace at which US oil supply moves from inland production to end refining markets. This means that a buildup or draw of inventory at Cushing will affect the price of crude.
Ahead of the weekly report, analysts make projections on inventory adjustments based on demand and supply expectations in that week.
If the readings from the EIA differ from analyst expectations, oil prices can move violently and provide great trading opportunities.
How to Interpret the Crude Oil Inventory Number!
The key to understanding the movement of oil prices lies within the basic principle of supply and demand.
Demand comes primarily from refineries that process this crude into refined products like gasoline and heating oil. Whereas, supply comes from domestic production and imports from other countries.
In general, a higher than expected increase of inventory will imply supply outweighs demand and should be bearish for crude prices. Whereas, a lower than expected supply can imply stronger demand and be bullish for crude.
A positive number is called a “build” and indicates an accumulation of inventory which means that crude prices are likely going to start dropping.
A negative number is referred to as a “draw” and indicates a decrease in inventory. This is quite bullish and means that crude prices are likely going to start climbing.
A draw across all three categories would be the most bullish scenario for crude. Whereas, a build across all three categories would be the most bearish scenario.
Let’s break down last week’s release to show you the volatility that this report can cause!
The previous number at 0.0M barrels represented a build the previous week. Going into the Wednesday session, analyst forecasts were that we were going to see a draw of 2.4 millions barrels. This would indicate a decrease of supply from the prior week and cause crude prices to rally.
The EIA number came out less than expected, however, still a draw. This is a bullish report and the resulting price action provides for some great opportunity! Take a look at the 5 minute Crude chart below to see what happens after the report is released.
The yellow arrow indicates 10:30 am EST when the report came out. Notice that the market initially drops seventy four cents on the release. After posting a low at $50.59, crude catches a bid and climbs almost two dollars in the next 45 minutes. That is a 1.45% move lower and almost 4% swing higher. With this kind of volatility, it’s no surprise why we look forward to Wednesday’s in our trading room!
How to Trade the Crude Oil Inventory Report
Trading the crude oil inventories report can make you a lot of money if you know what you are doing!
Check out this article for some trading strategies for the inventories release here.
If you manage risk correctly, let the algos play out and then take your trade, the potential is really limitless!
The below clip from our live trading room will
Oil prices can react violently when the EIA numbers greatly differ from analysts expectations. This is what makes the weekly oil inventory report such a favorite of ours to trade.
Now that you can interpret the number, you are better prepared to trade it profitably.
To increase your chance of success, there is nothing that can cut your learning curve down faster than joining a community of professional traders.
I hope the clip we shared is a testament to that!
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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.