Buying Oil Investments – Chapter 3: Factors which affect the price of oil

This is chapter number 3 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments

The prices of petroleum and its derivatives as well as natural gas Futures are continuously fluctuating reflecting its reaction to new information which affects expectation regarding its availability. Market sentiments play a huge role in affecting the price of this commodity and its derivatives due to our heavy reliance on oil to fuel the development of our standard of living. Any unexpected news is bound to cause the price of oil to spike. A notable example of this is the oil embargo imposed by OPEC in 1973 which cause the price of oil per barrel to rise from $3 to $12.

Periodically, new information is also released into the market about the oil industry. The effects of these reports on the price of petroleum vary and can range from being hardly conspicuous to severe. Although these reports are expected periodically, their contents might not be in synchronization with the market sentiments. This is especially true when market analysts analyse the periodic data concerning the inventories of petroleum and its derivatives as well as that of natural gas. Below is a list of sources where this data can come from:

Energy Information Administration:

The Energy Information Administration (EIA) is a sub agency of the US department of Energy. It publishes weekly data concerning the supply of oil and natural gas. Its main function is to accumulate, interpret and analyze all data relating to the energy sector objectively which serves to guide the policy making decisions of the Department of Energy.

The weekly reports concerning the US inventories of petroleum and its derivatives are published each Wednesday in two reports:

1. The Weekly Petroleum Status Report – released mid Wednesday morning and details the raw inventory data as well as the recent prices of commodities in the energy sector, products spot prices and the Futures contracts prices.
2. This Week In Petroleum – is issued on Wednesday afternoon. This report contains extensive data points and commentary from the EIA about the data published.

The weekly reports concerning the US inventories of natural gas are published each Thursday in two reports as well.

1. The Weekly Natural Gas Storage Report – is released on mid Thursday morning and is similar to the Weekly Petroleum Status Report in content.
2. The Natural Gas Weekly Update – is published on Thursday afternoon and contains data points and detailed analysis of the data published in the morning report.

These weekly reports are distributed free of charge and can be obtained by email when you sign up for them at the EIA’s website.

International Energy Agency:

The International Energy Agency (IEA) is the energy policy advisor to Organization of Economic and Cooperative Development (OECD). It also accumulates, interprets and analyzes all data relating to the energy sector objectively. The main difference between the EIA and the IEA is that the IEA deals with data concerning global supplies. Its analysis and findings is published monthly in the Oil Market Report. To receive the report, you will need to pay a subscription fee.

Crude Oil Inventories:

For any oil refineries, it main raw material input will be crude oil. Thus, its available inventory level will have a cascading effect on the inventories of all its derivatives. Therefore not only are the prices of oil futures contracts affected by crude oil inventory levels, the prices of the petroleum derivatives’ Futures contracts are likewise affected. Data concerning the oil inventory reflect both domestically produced inventories as well as imported inventories. 

Petroleum Product Inventory:

The petroleum product inventory data refers to the inventory levels of all petroleum derivatives like gasoline, jet fuel, distillate fuel oil, kerosene etc. as with crude oil inventory data, petroleum product inventory data can also identify the domestically produced inventories as well as imported inventories.

The reason why the data includes imported inventories is because of the sensitivity of these commodities prices to external factors besides from those found in the domestic economy. How great the influences will be depends on how big the imported inventories are.

Natural Gas Inventory Data:

This data concerns the storage of natural gas in more than 400 locations in 48 states in the US. It details the volume of natural gas available for consumption in the US. This data only represents domestically produced Gas as the physical nature of natural gas prevents it from being shipped over large distances. The data showcases absolute levels as well as reporting on current inventories as well as those of the past.

How these reports affect Oil and Natural Gas Futures Prices:

This data represents information about the circumstances which will form the current market sentiment about these commodities. When the contents of these do not match with the expectation of the market, this will prompt a process of reconciliation between the prices of these commodities and past expectations. The price adjustment will also ready the expectation of the market for future reports. The extent of departure of expectation from that of reported inventories will determine how far the price adjustment will be. 

Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion