For Canadian investors, Wednesday's release of U.S. oil inventories will be more important than the monthly, over-hyped Non-Farm Payrolls employment report on Friday.
The huge build-up in U.S. oil inventories is not the only driver of weaker commodity prices, but it's among the most important. On Wednesday at 10:30am, the Department of Energy is expected to announce an increase in inventories of 3.9 million barrels of oil, a sharp decrease from last week's build of 8.9 million barrels.
Canadians should be rooting hard for a smaller-than-expected increase in inventory levels. There are currently 406 million barrels of oil in storage according to the DOE, the highest levels in the past five years. This supply overhang represents a glut of supply that continues to depress the commodity price.
The chart below underscores the importance of inventory levels as a determinant of West Texas Intermediate crude prices. (Note that storage levels are plotted inversely to better show the trend – a falling red line indicates rising inventories.)
The steep decline in commodity prices was accompanied by a massive increase in inventory levels. The chart shows that while the year over year appreciation in the oil price was over 17 per cent in June of 2014, the year over year change in WTI is now trending around negative 40 per cent.
The rate of change in stored crude is moving quickly in the reverse direction – straight higher. In June 2014, inventories were being burned off at 1.7 per cent year over year rate. Last week, inventories were reported higher by 14 per cent relative to a year ago.
The WTI price has staged a welcome 15 per cent rally off the lows in recent days. A sharp decline in U.S. inventories in Wednesday's tomorrow's DOE report would bolster that rally – falling storage levels would provide an indication that lower prices are causing a supply response (lower production) that will help support the commodity price. A larger than expected increase in storage levels would show continued high production levels and an ongoing supply glut that threatens the recent price gains.
Follow Scott Barlow on Twitter @SBarlow_ROB.