23 March 2015

" LEAR BEFORE YOU EARN"

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How Crude Oil Inventories Impact The Market

A unique dynamic of the global oil industry supply-chain is the use of stored oil, called inventories, to buffer changes in supply and demand. Unlike many other commodities where production feeds directly into demand (e.g. production of oranges transported to the grocery store), oil producers have the ability to use inventories as well as new production to satisfy demand. Specifically, inventories allow producers to draw on reserve supply in response to unexpected shocks to supply and demand. Therefore, oil inventories – by being a component of supply – reflect market pressures on oil prices and provide a good barometer of oil price change.
There are a multitude of factors that can influence global oil inventories: from technological advances which increase production and storage capacity, to changes in taxation policies, to political unrest in the Middle East encouraging the increase of stockpiles. However, generally changes in inventory levels are the result of two main factors:

 (1) producers build or draw down discretionary inventories based on their price expectations and sale opportunities, 

and/or; 

(2) uncertainties or unexpected changes in supply and demand.




Regardless of the cause of their change, inventories provide an indication of whether the market is in a state of excess demand or over-production. For much of last year the oil market was in a state of over-production as producers operated at full-tilt trying to cash-in on record high oil prices


READ BELOW REFERENCE LINK FOR FURTHER KNOWLEDGE

http://www.timberlake.co.uk/download/oxmetrics-conference/Bello-OxM14-SaheedPaper.pdf