Gold & Commodities · Intermediate · 4 min

Supply, demand, inventories

You can explain how inventories connect supply and demand in commodity markets and why weekly inventory reports move prices.

The Wednesday number

Every Wednesday morning in New York, oil traders watch one number: how much crude oil sits in storage across the United States. Within seconds of its release, prices can jump or drop.

Why would a storage figure matter so much? Because it is the most direct measure of whether supply or demand is winning. This lesson explains how inventories link the two, and how to read the reports without overreacting.

Stocks are the buffer

Production and consumption of a commodity never match exactly. Mines, wells and farms produce at their own pace. Factories, drivers and households consume at theirs. The difference has to go somewhere.

Inventories are the stocks held in tanks, warehouses and silos between production and use. They act as a buffer:

When production exceeds consumption, inventories build up. That tends to weigh on prices.
When consumption exceeds production, inventories are drawn down. That tends to support prices.

Inventory levels also shape the futures curve. High stocks tend to go with contango, because near delivery is not urgent and storage must be paid for. Low stocks tend to go with backwardation, because the commodity is needed now.

For oil, the US Energy Information Administration publishes its Weekly Petroleum Status Report, usually on Wednesdays at 10:30 a.m. Eastern time, and later in holiday weeks. It shows changes in crude oil and fuel inventories, production and imports. Other markets have their own reports, for example for natural gas storage and for grain stocks.

As with all news, markets trade the surprise. Analysts publish expectations before each report, and prices react to the gap between expected and reported change. A single week is noisy, though. Traders compare inventories with the time of year and with the five-year average before drawing conclusions.

Expected −2m, actual +3m

Before a fictional Wednesday report, analysts expect US crude inventories to fall by 2 million barrels.

The report shows a rise of 3 million barrels instead.
Supply looks larger, or demand weaker, than the market assumed.
Within minutes, oil futures fall 2%.

A week later, the report shows a large draw, and prices recover most of the loss. One report moved the price, but the trend over several weeks says more about the market.

Common mistakes

Reading one week as a trend. Weekly data is noisy.
Ignoring expectations. The surprise moves the price, not the number alone.
Forgetting the season. Inventories rise and fall with the time of year.
Trading the release without a plan. Spreads widen and prices jump in the first minutes.

The takeaway

Inventories are the buffer between supply and demand. When they rise, prices tend to soften, when they fall, prices tend to firm. Reports show the change.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the buffer that absorbs the difference between production and consumption.

Tap the chart.

When production exceeds consumption, inventories build up. When consumption exceeds production, they are drawn down.
2When does the US EIA usually publish its weekly petroleum inventory data?

The EIA's Weekly Petroleum Status Report usually comes out Wednesdays at 10:30 a.m. Eastern, later in holiday weeks.
3Analysts expected a draw of 2 million barrels, but inventories rose by 3 million. What often happens to oil prices?

As with all news, markets react to the surprise. A build instead of a draw signals weaker demand or stronger supply.
4Why do inventories matter for the futures curve?

Plentiful stocks make near delivery less urgent. Scarce stocks make it valuable, as the lesson on contango explained.

of 4 correct.