Oil Prices are Crashing - Time to Count Barrels and Track Flows to See What's Next
A deep dive into oil inventories, supply disruptions, and what they mean for oil prices and equities.
Amid the largest oil supply disruption in history, there are three key questions:
How many barrels of oil are in storage?
How quickly are those barrels being depleted?
What does this mean for oil prices and related equities?
There is a lot of noise in the market. Some estimates are being published that treat SPR releases and other inventory draws as if they’re new supply, when those are actually still barrels coming out of storage. Other estimates are too high, confusing “disrupted” barrels that are still reaching end markets with “missing” barrels that are not.
The “missing” number is a truer estimate of how quickly oil is being pulled from storage, because it’s an estimate of barrels not reaching end markets that otherwise would have.
I calculated how quickly inventories are drawing down, which allows for a real-data framework for thinking about future oil prices. Historically, inventories and oil prices have moved inversely: when inventories are low, prices tend to be higher, and when inventories are high, prices tend to be lower.
Analyzing the pace of the current drawdown and the historical relationship between inventories and prices offers me a credible, directional framework for thinking about how oil prices may respond if the Strait reopens tomorrow, one week from now, one month from now, or, in a worst-case scenario, several months from now or longer.
Below, I do a deep dive analysis into these fundamentals. I then explore the implications for energy equities, particularly the investment ideas I’ve shared here on Bison Insights.
These ideas have done quite well despite the recent pullback, both on an absolute basis and versus the XOP oil & gas producer ETF and the broader stock market:
Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance is not indicative of future results.
