What's the Impact of a Narrow WTI–Brent Spread on US Producers?
Crude oil inventories
The API (American Petroleum Institute) released its weekly crude oil inventory report on Tuesday, December 22, 2015. The report stated that US crude oil inventories fell by 3.6 MMbbls (million barrels) for the week ending December 18. Analysts expected that inventories would rise by one MMbbls for the week ending December 18.
Why did crude oil inventories fall?
When analysts expect a rise in crude oil inventories, a surprise fall in inventories would certainly boost crude oil prices (USO). The drawdown of 3.6 MMbbls (million barrels) of crude oil inventories is the biggest drawdown in the past 13 weeks.
The fall in the crude oil inventories could have occurred due to greater demand or lower production levels. Crude oil refinery inputs from the past few weeks were on a downturn due to lower demand for refined products, but the mid-winter season could have boosted demand for heating oil, and that would raise crude oil demand.
Also, US crude oil imports are gradually falling as they went from 14 MMbpd (million barrel per day) to 9 MMbpd.
What’s the impact of an inventory drawdown?
The fall in crude oil inventories boosts WTI (West Texas Intermediate) prices. That, in turn, raises the revenues of crude oil producers as they sell their products at higher prices than before. The rise in revenues could raise the profits of the crude oil producers such as Anadarko Petroleum (APC), ConocoPhillips (COP), EOG Resources (EOG), and Occidental Petroleum (OXY).
Conoco Phillips (COP) accounts for 3.6% of the Energy Select SPDR (XLE).
The rise in crude oil prices encourages producers to increase production volumes. Of course, when production volumes increase, transport volumes also increase. The increase in transport volumes raises revenues of MLPs such as the Advisory Research MLP & Energy Infrastructure ETF (MLPPX).
Find more updates on WTI crude oil in the next part of this series.
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