Forex factory crude oil inventory expectations

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None of the blogs or other sources of information is to be considered as constituting a track record. Any news, opinions, research, data, or other information contained within this website is provided as general market commentary and does not constitute investment or trading advice. A decline in demand for crude oil could mean that the industrial sector is cutting back on production and manufacturing.

Being one of the largest employers in the US, scaling down industrial operations translates to massive job losses. There will be an overall increase in unemployment in the economy. The resultant unemployment also has its ripple effects on the consumer economy. Due to the decrease in disposable income, households will only spend on essential goods and services. As a result, the consumer discretionary industry will take a hit. This increase in the US crude oil inventories can be witnessed towards the end of the first quarter in At the onset of the coronavirus pandemic, lockdowns and social distancing guidelines halted industrial activities and traveling.

The demand for US crude oil took a hit, and inventories dramatically increased. Source: Investing. An increase in crude oil demand in the transportation sector could imply that more people are buying vehicles, which is an indicator of improved household welfare. In the industries, an increase in demand for crude oil means that industrial activities are expanding.

This expansion translates to increased job opportunities and lower unemployment rates. However, note that it is more plausible that a decrease in oil inventories can be a direct result of cutbacks in oil production by drilling companies.

Back to the basics of the economy, the laws of supply and demand. It is inherent for any producer to strive to obtain the highest possible price in the market. According to the laws of supply and demand, oil producers might be attempting to stabilize the oil prices by cutting back on production. When prices are falling due to a decrease in demand, crude oil producers will try to cut back on drilling to stabilize the price.

This scenario was witnessed at the beginning of the second quarter of The graph below shows the decline in oil rigs that were operational in the US at the beginning of Q2 Source: Trading Economics Due to depressed crude oil demand, crude oil prices were on a freefall, which led to cutbacks in production, hence a significant decline in inventories.

Note that this decline in the US crude oil inventories does not coincide with economic expansion. This decline in demand can imply that operations in major crude oil dependent sectors are scaling down. These are signs of economic contractions, which will make the USD depreciate in the forex market. Conversely, when the inventories decrease, it could mean that the demand for crude oil has increased significantly.