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Crude Inventories Report: The More People Watch It, The Less Useful It Becomes

by: Bespoke Investment Group June 06, 2007 | about stocks: OIL / USO    
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Hickey and Walters (Bespoke) submit: For this week's Department of Energy [DOE] inventory report, traders are expecting the following results:

• Crude Oil: +125K
• Gasoline: +1600K
• Distillates: +900K

With the rise of crude oil prices, the weekly energy inventory report has gained widespread popularity. What used to be an arcane report that economists paid little or no attention to is now a showstopper. If they don't already, it's only a matter of time before CNBC puts a clock up on the screen every Wednesday morning counting down to the release of the report.

But is the DOE's inventory report a useful tool to trade off of? We looked back over the weekly releases and found that like most popular indicators, the more people that watch i,t the less useful it becomes. The chart below shows the difference between actual and estimated weekly crude oil inventories versus the one day change in the price of oil on the day of the report. Over the long term, the two have been negatively correlated (-0.3), indicating that when inventories showed a bigger draw than expected, oil went up in price and vice versa. Over the last six months however, we have found that the negative correlation has dwindled to the point where there is no correlation (0.0) between the two variables.

oil invesntories vs. price

Bespoke Investment Group

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This article has 2 comments:

  •  
    Jun 06 02:04 PM
    This phenomenon is a confirmation of the efficient markets hypothesis as the trading value of this information has gone to zero as the amount of attention paid to the data increased.

    Although this information is now useless as a trading indicator, it does tell us that crude prices have become disconnected from US inventories. According to the EIA's data, crude inventories have been at the top of their historical range for more than a year...so the price of crude reflects future event risk more than it does current supply concerns.
    Reply
  •  
    Jun 07 12:45 PM
    "Zman" and his readers need to take a long, hard look at the above invaluable article. Inventories have been and always will be an ongoing commentary on either infrastructure or planning...none of which tell us a thing about the critical areas of oil/gas depletion or the latest geopolitical/weather bottleneck or blowup. Attempting to construct investment scenarios or trends (even single week) is a misleading exercise in self delusion.
    Also..I don't know how one can draw anything like efficient market hypothesis confirmation from the above. Even a -.3 correlation is in no mans land...pay attention when a correlation is at least +/- .80. The whole notion of efficient markets is critically undermined by parabolic spikes/descents..among other things in the real world.
    Reply
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