Assessment of the relationship between oil prices and US oil stocks

This paper qualitatively and quantitatively analyzes the relationship between US monthly ending oil stocks position with that of West Texas Intermediate (WTI) oil prices from February 1995 to July 2004. The paper concludes if other things are held constant, WTI is inversely related to the petroleum products (PPP), combined petroleum products and crude oil (CPPP), crude oil alone (Crude), total oil stocks including petroleum products, crude oil and strategic petroleum reserves SPR (Total), total gasoline (TGO), total distillate (TDO). It could not establish a statistically significant and negative relationship with SPR when run alone. One percent increase (decrease) in CPPP, PPP, Crude, Total, TGO and TDO leads to decrease (increase) in WTI, respectively, by 0.70, 0.43, 0.37, 0.97, 0.26 and 0.21 percent. Oil prices are largely influenced by total crude and Crude and PPP inventories levels while modestly with variations in gasoline and distillate stocks levels. Despite a healthy increase of over 22 percent in SPR from January 2001 to April 2004, it did not result in easing of oil prices. Primarily because SPR are meant for security of supply concern and are only released under extreme conditions by the President of United States, they are neither meant for the purposes of balancing supply–demand gap nor for the stability of oil prices. The aggressive SPR buildup in recent years is related to international terrorism, geopolitical situation in the Middle East, particularly in Iraq, that encourages US government to enhance its SPR to meet any short-term eventuality. The analyst must keep a close eye on CPPP and the total oil stocks variation to forecast WTI in the short run whilst gasoline and distillate influence oil prices modestly in the short run. SPR, on the other hand, are expected to play a pivotal role in balancing oil prices and in providing a critical resource for the economy in case of any major shortfall in the long run.