Understanding Inventories of Oil

Inventories or stocks of oil are needed to keep the global supply system operating. They feed the supply chain from the tankers crossing the oceans to the tanker truck delivering to your house. There are 7-8 billion barrels of oil in industry and government inventory most of the time.

To understand the behavior of oil markets it’s important to grasp what is meant by oil stocks meaning inventory or oil, not buying Exxon or Chevron stock or investing privately in companies like, Western Pipeline Corporation. Oil is a commodity; a raw material that can be bought or sold. In a commodity market stocks and price movements are inescapably linked together. Oil delivered into a market can come from two potential sources: a fresh source such as imports of crude oil or gasoline from a refinery or from stocks (inventories) – the market buffer. Stocks supply only a small amount of the oil delivered to the market. Stocks do provide valuable information about what market segment be it a region, a product, or a company has too much or too little or just the right amount of oil. They indicate the availability of the next delivery. If stocks are low in the Eastern United States its most likely prices will go up there and when stocks are high prices will most likely fall.

The market pays close attention to reported and projected stock levels because of the linkage of stocks and price movements. Weekly and monthly reports of both reported and projected stock levels are widely read by those in the industry or invested in the industry.

There are two types of oil stocks: discretionary and non-discretionary. Non-discretionary stocks are either considered necessary or are mandated by governments. These non-discretionary stocks include: oil in transit from supplier to purchaser, oil that can’t be used without also impairing delivery reliability, storage of oil mandated by governments and oil to smooth unpredictable flows. An example of impairing delivery reliability is the amount of oil that must stay in a pipeline which is called pipeline fill. The Alaskan pipeline holds about 9 million barrels of crude oil all the time.

Only 10-15% of the world’s oil stocks are usable by the industry when and how it chooses. These stocks are called discretionary stocks. It’s the movements in this small 10-15% that link to prices. A small inventory increase or decrease of the total stock level can result in a large price change because of the small amount (10-15%) that can be used.