The deepest year over year declines in U.S. gasoline inventories since 2014's energy price collapse are providing an increasingly positive backdrop for crude oil stocks.
The chart below shows the year over year percentage change in U.S. gasoline inventories (annual change data help remove seasonal effects from the trend lines) compared with the West Texas intermediate crude price.
The most recent weekly report on gasoline inventories (period ended Nov. 10) indicated a 5.2-per-cent fall in supplies, the biggest draw on reserves since October, 2014. The result is a significant departure from the three year average of a 2.8-per-cent build in inventories.
The relationship is not completely consistent over the past five years, but the chart shows that oil prices tend to move in the opposite direction of gasoline inventories (this is confirmed by correlation calculations). As gasoline inventories are depleted, refiners buy more crude to convert to gasoline to replenish supplies and this provides fundamental support for oil prices.
Most recently, the pace of change in inventory levels has dropped from an 11.8-per-cent year-over-year increase in July, 2016, to last week's the 5.2-per-cent decline, and this has corresponded with a 24.4-per-cent jump in crude prices to $56.74 (U.S.) a barrel.
As a driving factor for oil prices, gasoline supplies have taken a back seat to geopolitical risks in the Middle East and for good reason.
But gasoline inventory draws remain an important leading indicator for energy prices: They are not headline dependent like political factors and investors can be more confident in a continued higher commodity price for as long as the trend lasts.
Scott Barlow