What Is the Impact of Changes in Oil Products Reserves on Prices?

Елена Берсенева 31 March 2022 672

The article examines the impact of published oil and petroleum products reserves data on the futures’ value.

Oil reserves data are updated every Wednesday.

On this day, the US Department of Energy releases the following indicators:

U.S. crude oil reserves;
U.S. weekly crude oil reserves;
Cushing oil reserves excessU.S. crude oil reserves;
U.S. weekly crude oil reserves;
Cushing oil reserves excess;
U.S. fuel oil reserves.

Let us determine the impact of published reserves data on quotes of the relevant futures contracts.

Growth in oil and petroleum products reserves leads to decline in stock-exchange quotes of these energy sources.

The decline in reserves has a boomerang effect: an increase in prices is caused by energy shortages.

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Next, we test the hypothesis by comparing data on reserves and energy production volumes with fluctuations in their stock quotes:

Compare changes in oil reserves with the dynamics of Brent crude oil prices;
Compare changes in gasoline stocks and production gasoline volumes with the dynamics of RBOB gasoline prices;
Compare changes in fuel oil reserves with the dynamics of fuel oil prices.

Brent crude oil future (the BZ ticker), over the 2016-2019 period, 880 values;
RBOB gasoline future (the RB ticker), over the 2016-2019 period, 1,058 values;
Fuel oil future (the HO ticker), over the 2016-2019 period, 908 values;
U.S. crude oil reserves, over the 2016-2019 period, 180 values;
Excess Cushing oil reserves, over the 2016-2019 period, 179 values;
U.S. weekly crude oil reserves, over the 2016-2019 period, 180 values;
U.S. gasoline reserves, over the 2016-2019 period, 179 values;
U.S. gasoline production volumes, over the 2016-2019 period, 179 values;
U.S. fuel oil reserves, over the 2016-2019 period, 179 values.

Opening prices quotes on the daily timeframe (D1) are taken for the analysis.

The total 1,076 published observations of reserves and production outputs.

Volatility determination

Before we assess a direct influence of the stock statistics release on the oil and petroleum products prices, we analyze the impact of news release on the term market volatility.

To do this, we compare the daily futures volatility on the release day with the average daily volatility for the previous week:

Daily volatility, %

Futures	Indicator	On the release day	For the previous week
Brent crude	Crude oil reserves (EIA)	3.00	2.83
	Excess oil reserves in Cushing (EIA)
	U.S. weekly reserves (API)
RBOB gasoline	U.S. gasoline reserves	3.18	2.46
	U.S. gasoline production volumes
Fuel oil	U.S. fuel oil reserves	2.80	2.55
Average value		2.99	2.61

Note that on the release day, the volatility is 15% higher compared to the average volatility for the previous weekly period.

Now we make a hypothesis test against the fact that the growth in oil and petroleum products reserves leads to decrease in their prices.

The test is carried out with the two independent methods:

Calculate correlation coefficients between changes in reserves and quotes;
Determine the rate of return.

Correlation coefficient

Futures	Indicator	Correlation coefficient
Brent crude	Crude oil reserves (EIA)	0.03
	Excess oil reserves in Cushing (EIA)	0.09
	U.S. weekly reserves (API)	0.03
RBOB gesoline	U.S. gasoline reserves	-0.10
RBOB gesoline	U.S. gasoline production volumes	-0.03
Fuel oil	U.S. fuel oil reserves	-0.05
Average value		-0.005

When calculating the correlation, we take petroleum products quotes at the time of the fifth day opening after the data release. This time lag is set in order to allow prices to take into account news data.

As can be seen, there is no connection between futures prices fluctuations and changes in reserves.

Calculating the rate of return

The rate of return reflects relative changes in the futures price on the 5^th day after the data release in %.

If the reserves expand and the future price falls, the rate of return is positive and is equal to quotes changes in %.

If the reserves expand and the future price rises, the rate of return is negative.

Futures	Indicator	Rate of return, %	Rate of return, %
Brent Crude	Crude oil reserves (EIA)	0.092	-0.131
	Excess oil reserves in Cushing (EIA)	-0.182
	U.S. weekly reserves (API)	-0.304
RBOB gasoline	U.S. gasoline reserves	0.182	0.070
RBOB gasoline	U.S. gasoline production volumes	-0.042	0.070
Fuel oil	U.S. fuel oil reserves	0.075	0.075
Average			0.005

In general, oil and petroleum products have yielded a positive rate of return after publishing reserves data. But, its value is so low (0.005 %) that the connection between changes in reserves and future prices can be considered as missing.

We consider this situation from the other perspective.

The following calculations are made:

Rate of return from oil purchase/sale conditioned with the simultaneous signals of three oil reserves indicators (Crude oil reserves, weekly reserves, and excess reserves).
Rate of return from oil purchase/sale conditioned with the simultaneous signals of two oil reserves indicators (Crude oil reserves, excess reserves).
Weekly reserves are excluded in this case because of high correlation of indicators for Crude oil reserves and Weekly oil reserves (the correlation coefficient is 0.74).

Indicator	Three indicators	Two indicators
Share of cases of unidirectional changes in reserves indicators, %	38.8	51.7
Share of profitable positions, %	46.5	52.2
Rate of return, %	-0.25	-0.09

The rate of return is insignificant in both cases. So, the correlation has not been revealed.

The next step is to calculate the rate of return and correlation coefficient according to the degree of dispersion of the published indicators and to the standard deviation. We calculate the standard deviation over the previous 4 weeks.

Rate of return, %

Group	Crude oil reserves	Weekly reserves	Excess oil reserves
more than 2 deviations (in a positive way)	0.081	-0.574	-0.409
between one and two deviations (in a positive way)	0.241	-1.045	-0.885
within one deviation	-0.003	0.063	-0.124
between one and two deviations (in a negative way)	0.832	0.482	0.148
more than 2 deviations (in a negative way)	0.121	-1.057	0.332

Correlation coefficients

Group	Crude oil reserves	Weekly reserves	Excess oil reserves
more than 2 deviations (in a positive way)	-0.21	0.28	0.12
between one and two deviations (in a positive way)	-0.29	-0.06	0.14
within one deviation	0.04	-0.04	0.07
between one and two deviations (in a negative way)	0.21	0.10	0.09
more than 2 deviations (in a negative way)	0.09	0.21	0.

Number

Group	Crude oil reserves	Weekly reserves	Excess oil reserves
more than 2 deviations (in a positive way)	17	10	20
between one and two deviations (in a positive way)	17	27	24
within one deviation	96	92	86
between one and two deviations (in a negative way)	27	27	27
more than 2 deviations (in a negative way)	16	17	16

Rate of return and correlation coefficients are different.

The exception is the groups with more than 2 standard deviations in both positive and negative ways of the weekly reserves.

For these groups, the correlation coefficient shows a weak direct correlation between the oil price and weekly reserves. This has been proved by significant negative return rate.

So, the oil price soars because of the “strong” growth in weekly reserves; whereas the oil price falls because of the “strong” decline.

There has been no connection between changes in reserves and prices for the appropriate futures.

When publishing reserves data, the daily volatility of futures prices increases.

The hypothesis of the inverse correlation between changes in oil and petroleum products reserves and stock quotes of these energy sources has not been confirmed.

A direct connection with the oil price has been revealed for "strong" fluctuations in weekly oil reserves.

Detailed results are shown in the Appendix:

XLSX (0.01 MB)Oil and petroleum products reserves.xlsx