Last week we wrote about the usefulness or otherwise of weekly EIA data on US crude oil in storage, given the shortcomings of the data itself and the comparative paucity of similar indicators from other big oil importers.
Well John Kemp has crunched some numbers to prove* that it’s not too useful — at least, not now:
He says the correlation is there, but it’s ”very weak and too unstable to have much predictive value”.
…the lack of a strong and stable correlation between reported inventories and front-end prices (which should be most affected by near term supply-demand imbalances and the inventory cushion) is nonetheless striking. Physical oil inventories have had less predictive power over oil prices than movements in U.S. equities since the start of 2008.
Kemp says this is another sign of the ‘financialisation’ of crude oil prices.
Financial players seem more willing to “look through” temporary supply-demand dislocations to focus on the medium-term horizon (2-5 years out), using oil as an asset for positioning on the outlook for global growth, inflation and currency movements, as well as the prospects for supply meeting long-term demand projections.
Which leads us to idly ponder, isn’t this perhaps a good thing, given that the the length of time it takes for oil production to ramp up is thought to be a key cause of price volatility and production squeezes?
*Kemp carefully points out several caveats in his data, which we’ll summarise briefly: it does not account for the few weeks a year that EIA data is released a day late due to public holidays; it only takes into account the price movement at close; and the Nymex WTI contract is used by some as a proxy for global demand rather than US demand. His fourth caveat is that the EIA data have other shortcomings anyway – they are not revised, but merely updated each week, providing for the sometimes large swings from week to week when flaws are corrected (last week’s Dow Jones/WSJ story about EIA data flaws highlighted one dramatic example of this).