How Oil Supply Data Informs Traders - dummies

How Oil Supply Data Informs Traders

Oil supply data became a central report outside of the oil markets in 2004 and 2005 as the price of crude oil soared to record highs after the war in Iraq.

The Energy Information Agency (EIA), a part of the U.S. Department of Energy, and the American Petroleum Institute (API) release oil supply data for the previous week at 10:30 a.m. eastern time every Wednesday.

Traders want to know the following:

  • Crude oil supply

  • Gasoline supply

  • Distillate supply

A build is when the stockpiles of crude oil in storage are increasing. Such increases are considered bearish or negative for the market, because large stockpiles generally mean lower prices at the pump. A drawdown, on the other hand, is when the supply shrinks. Traders like drawdown situations, because prices tend to rise after the news is released.

Every week, oil experts and commentators guess what the number will be. Although they almost never are right in their predictions, the fact that they’re wrong sets the market up for more volatility when the number comes out and gives you a trading opportunity if you’re set up to take advantage of it.

A good way to set up for the oil report, or any report, is to set up an options strategy called a straddle. A straddle gives you a chance to make money if the market rises or falls; it essentially sets you up for any surprises. For the oil markets, you can set up straddles on crude oil, natural gas, heating oil, or gasoline futures. You can also set up straddles on individual oil stocks such as Valero Energy (NYSE: VLO), which usually is a big mover on reports.

Although crude oil supply is self-explanatory as the basis for the oil markets and is important year-round, two other supply factors are affected by these seasonal tendencies:

  • Distillate supply figures are more important in winter, because they essentially represent a measure of the supply heating oil.

  • Gasoline supplies are more important as the summer driving season approaches.

Other holidays sometimes can affect oil supply numbers. The market tends to factor their effect into the numbers, though, so for other holidays to have a big effect on trading, the surprises have to be very big.