Crude oil inventories represent the difference between supply and demand, making this piece of information critical to forecasting oil prices.
There is an even greater need in the current environment considering the extreme levels of volatility and uncertainty roiling the oil market.
The solution, Ursa Space’s Oil Inventory Index, is available now – providing a daily view of global oil storage trends that can signal the future direction of oil prices.
What is Ursa’s Oil Inventory Index?
The dataset is based on our measurements of floating-lid oil storage tanks around the world using synthetic aperture radar (SAR) imagery from satellites.
The Oil Inventory Index leverages this expertise, while offering a higher level view of market dynamics that should provide value to customers in energy, finance, macroeconomics and international security.
When the Index increases, it means global inventories are rising by more than usual for the same time of year, which is bearish for oil prices. Conversely, a falling Index sends a bullish price signal.
With that in mind, it makes sense for there to be an inverse relationship between the Index and oil prices, as shown in the graph below:
Since early 2018, when the Index began, the correlation with Brent crude futures, the global benchmark, has been equal to negative 0.86, said Connor Haley, data scientist at Ursa Space.
The coefficient can range from zero to a “perfect” negative correlation of minus 1.0.
“More importantly, the correlation is equally strong at negative 0.85 when comparing the Index to Brent crude futures four weeks later, underscoring the Index’s potential as a leading price indicator,” Haley said.
Because the stock price for publicly-traded oil companies is often directly tied to the price of oil, another angle to consider is equities.
A list of such names would include Schlumberger Ltd. (SLB), Hess Corp. (HES), Halliburton Co. (HAL), Baker Hughes Co. (BKR), Marathon Petroleum Corp. (MPC), Chevron Corp. (CVX) and APA Corp. (APA).
Know the Data
The dataset expresses daily inventory volumes (number of barrels) on a Global, OECD and Non-OECD basis.
You can discern oil market trends by looking at this data alone; however, to make the analysis easier, we created an index with a dividing line of 100 between “above normal” and “below normal.”
“An index provides important context that helps to amplify the price signal,” noted Ursa’s Haley.
“Our methodology controls for normal seasonal variations, and enables an apples-to-apples comparison over time and across differently-sized markets, such as OECD and Non-OECD,” he said.
We took the average of monthly inventories over a five-year period (2015-2019) to represent normal levels, which were then plugged into the index equation as the denominator.
A score of 100 means inventories are equal to “normal” for the same time of year. A score above 100 means “above normal” and a score less than 100 signifies “below normal.”
Analyze key moments
The Oil Inventory Index can be used to discover whether price movements that occur in anticipation of a shift in the supply-demand balance are justified or not.
We previously showed an example from 2021 when oil prices rose steadily in anticipation of stronger demand as economies reopened from shutdowns. The index fell steadily during this time period, supporting the case for higher oil prices.
A different scenario unfolded in March 2022 when oil prices skyrocketed to $120 per barrel following Russia’s invasion of Ukraine. Traders anticipated that international sanctions against Russia’s oil exports would erase supply from the market.
Yet, the Index didn’t fall further the next few months, and even rose slightly. The increase in oil prices was not justified by the Index, but rather by fear of reduced supply.
What happened next? Oil prices reversed course, and fell steadily during the summer. As of this writing, in mid-December, Brent crude was below $80.
The Oil Inventory Index arrives at a time when the price of oil figures prominently in other major topics, notably inflation and geopolitics, making it useful to professionals outside the core audience of energy market traders.
Interested in generating alpha?
This alt-data product is available now on AWS Marketplace.