Oil Took A Beating But Fundamentals Are Improving

Sep. 23, 2015 3:15 PM ETAREXQ, ROAN, LNCOQ, RIG, USO132 Comments


  • Oil and anything tied to it took a beating after news broke that oil inventories fell more than expected but that gasoline stocks rose week-over-week.
  • This news looks bad for investors but when you look at inventory levels, production data, gasoline consumption and total petroleum stocks, the picture is already improving.
  • This will be a bumpy road to recovery for crude but investors should be more optimistic moving forward than they are today.

Oil prices moved sharply lower on September 23rd after news broke that oil inventories for the prior week dropped much more than analysts anticipated. Based on the news provided, investors should be optimistic moving forward but it seems Mr. Market is unhappy because of rising gasoline stocks and because the drop in inventories was much less than what the API (American Petroleum Institute) expected. As a result of this move lower, companies such as Linn Energy (LINE) / Linn Co (LNCO), Approach Resources (AREX), and Transocean (RIG), moved much lower, as did the United States Oil ETF (USO). Given all of this, should investors lament over the news or should they rejoice at more positive signs that the energy market is poised to correct itself?

Inventories dropped

According to the EIA (Energy Information Administration), inventories for the prior week fell to 454 million barrels. This represents a 1.9 million barrel falloff compared to the 455.9 million barrels the organization reported a week earlier. There is no doubt that this is positive news for investors especially because the drop is far larger than the 0.53 million barrel decline market participants had hoped for. Even though the drop was better than expected, however, it's much lower than the 3.7 million barrel falloff the API reported a day earlier.

In the graph above, you can see what the trend has been like for crude supplies over the past year. Since the end of April of this year, the general trend has been toward less crude being held in storage, driven by a combination of falling imports and lower production levels. Using the methodology of a previous article I wrote regarding the topic, I can conclude that inventory levels are probably about 94.2 million barrels oversupplied compared to their historic average. While this is certainly bearish, it

This article was written by

Daniel Jones profile picture
Robust cash flow analyses of oil and gas companies

Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

Disclosure: I am/we are long LINE, AREX, RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My stake in Transocean is in the form of call options dated January of 2017, not shares of the enterprise.

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