There is no underestimating the importance of oil prices on the underlying health of the economy. As oil prices move up or down, inflation follows in the same direction. Energy from oil is used for everything from heat to manufacturing to transportation, therefore if oil costs rise, so do the costs of many consumer products and the overall cost of living. In times of high oil prices, the Federal Reserve (Fed) may even adjust interest rates to prevent further inflation. This is just one sign of the fundamental interrelation between oil and the overall U.S. economy.
Even with the rise of algorithmic and quantitative trading, the basic principle of supply and demand is always key to understanding the movement of oil prices. When monitoring supply, energy traders pay particular attention to the weekly U.S. Energy Information Administration (EIA) Petroleum Status Report, which reports on U.S. crude oil inventories, both domestically and abroad. This report is released by EIA each Wednesday at 10:30 a.m. Eastern Time.
Traders also consult the American Petroleum Institute (API) Weekly Statistical Bulletin Report, released on Tuesdays at 4:30 p.m. Eastern Time. This report covers U.S. Crude inventories and data related to refinery operations, as well as the production, imports and inventories of the four major petroleum products: motor gasoline, kerosene jet fuel, distillate fuel oil and residual fuel oil.
Additionally, the weekly Baker Hughes Rig Count, which reports on total U.S. oil rigs, may provide an indication of future oil production and inventories in the U.S.
While these weekly releases provide essential data points for understanding current U.S. oil supplies, traders must also pay attention to international politics and policy. In the Middle East, the Organization of Petroleum Exporting Countries (OPEC), regularly meets to exercise control over production quotas and oil prices. Since OPEC controls 60% of the world’s oil, OPEC policy changes can heavily impact global oil supply and demand.
One major difficulty when analysing the outlook for energy markets is that supply and demand are impacted by many diverse factors, including geo-political tensions, seasonal elements such as winter heat and summer driving, refinery outages and world events both in the U.S. and abroad.
For this reason, many successful oil traders maintain an in-depth knowledge of political issues in oil-producing regions, as well as a strong technical understanding of the refining process. On the other hand, inventory updates by the API and the EIA requires considerably less analysis. In essence, if the EIA number shows a higher-than-expected increase in crude supply inventories, it implies greater supply strength and can be bearish for crude prices. Likewise, a reported weaker-than-expected supply can imply a stronger demand.
There are a number of factors to think about when trading U.S. oil data but with a little insight and thorough preparation, these markets provide numerous opportunities for traders.