by James Cordier & Michael Gross
An outsider watching the prices of crude oil shift up or down may think this is some sort of random event.
“Who is causing this?” gas buyers and clueless politicians often demand, as though an evil oil company executive is sitting in a room throwing a lever to turn the supply on or off.
As an investor willing to do a little homework, however, you’ll find projecting price ranges for oil is a little less populist rhetoric and little more science and common sense.
Demand Cycles for Oil
Oil is one of the most cyclical markets there is. This alone takes some of the mystery out of projecting overall direction of prices.
Oil demand surges during summer months as excesss gasoline demand from summer “driving season” forces refineries to ramp up production. This increases demand for crude oil.
This refinery cycle is illustrated in the Chart below:
You will also notice that this pattern tends to repeat itself in the fall as refiners switch over production to heating oil and ramp up again into the early winter months.
These are only tendencies and only one factor that go into price discovery of oil. But an astute trader who is aware that demand for crude tends to be strongest in Spring and summer and weaker in the fall can be a step ahead of other traders who are attempting to predict price direction “blindly” while following only charts or news reports.
How to Gauge Supplies
Cyclical tendencies should not be viewed in a vacuum however. The absolute amount of supply plays a big role as well. (To see how supplies can sometimes trump seasonal tendencies, read our latest trading update “Game Changer in Crude Oil” now at OptionSellers blog.
Fortunately, anyone can track weekly builds or draws in crude oil through a weekly report released by the Energy Information Association (EIA). The EIA tracks and reports weekly US inventories of crude oil.
Each week’s number is not so important in and of itself. But by following the trends in the reports (ie: are supplies rising or falling; how does this compare to past years) one can obtain a wealth of information about the oil market that tends to be hidden from public eye.
Example of weekly EIA report below:
Weekly stock reports are not as important as the overall trend of builds or draws in stocks.
For instance, the chart above shows, while following a typical seasonal pattern, 2015 supplies are so far above “normal” levels for this time of year, that it casts a bearish pall over prices. This is true even during a time of year when demand tends to be peaking.
Traders used to watching the news may ask “But what about Iran? What about China? Don’t they affect oil prices?”
Yes, they do. But only in relation to how they affect (or are expected to affect) global supply and demand. The score is kept on charts like the ones above.
Knowing what they are at any given time of year can give you a considerable advantage over those unfamiliar with them.