Oil Inventories Are Falling, but What Does It Mean?

Michael Giberson

At Energy Outlook, Geoff Styles writes:

Oil prices set another record last week, closing above $145 per barrel for the first time, on the strength of heightened fears of an attack by Israel or the US on Iran, combined with a dip in US commercial oil inventories below 300 million barrels, their lowest level since the end of January and at the bottom of their seasonal historical average range. But although lower inventories are generally a bullish signal for the market, we shouldn’t forget that the relationship between prices and inventories runs in both directions. Current and expected future prices, along with actual supply and demand, play a significant role in guiding companies in setting their desired inventory levels.

Styles continues, “Determining whether a drop in inventories reflects tight supplies or expected future weakness depends on a broader array of indicators,” and then examines some of those indicators to see what can be said about oil inventories and oil prices.