The latest weekly inventory data from the EIA shows a significant drop in crude oil—down 11.473 million barrels—compared to the expected drop of 1.794 million barrels. Gasoline inventories saw a small increase of 0.209 million barrels, which is less than the expected rise of 0.627 million barrels. Distillate stocks increased by 0.514 million barrels, exceeding the anticipated growth of 0.440 million barrels. In Cushing, inventories fell by 0.995 million barrels, following a decrease of 0.403 million barrels last week.

Crude Oil Price Movement

Despite this large reduction in crude oil inventories, prices have actually dropped. Currently, crude oil is priced at $72.23, with a recent low of $71.48. A decrease of more than 11 million barrels is typically associated with rising prices, suggesting stronger demand or interruptions in supply. However, the price has decreased instead. Crude oil fell to $71.48 before settling just above $72, which is surprising given the significant inventory drop. At the same time, we noticed a slight increase in gasoline and distillate stocks. Gasoline rose just below expectations, while distillates increased slightly above. This situation doesn’t indicate a supply glut or a demand spike; it looks more like inventories are stabilizing. Refiners might be preparing for increased summer transport demands, or they could be cautiously positioning themselves ahead of broader economic signals.

Impact of Inventory Changes

In Cushing, we saw another decline, continuing the trend from last week. This isn’t just another number; Cushing serves as the delivery point for WTI contracts and is a key indicator of regional market tightness in the central U.S. Two consecutive weeks of significant inventory drops suggest tightening conditions. Yet, the broader futures market doesn’t seem to believe that demand justifies sustained price increases, at least for now. Where do we stand? The difference between inventory changes and price reactions deserves attention. When clear supply reductions lead to falling prices, other factors may be influencing the market—such as macroeconomic expectations or changing risk appetites. Prices might be anticipating weaker activity in the coming months, even while current data suggests otherwise. This opens up opportunities for volatility strategies. If large inventory draws aren’t raising prices, there’s potential for further declines without hitting strong support levels. We don’t see this as a freefall but recognize that implied volatility seems undervalued compared to historical levels for similar inventory changes. We must also consider the pricing curve. Weakness in flat prices can hide steep backwardation or subtle changes in calendar spreads. These signals of physical tightness at the front end may not yet be reflected in the later months. Given these circumstances, familiar curve trades deserve another look. We’re particularly interested in short-term positioning opportunities with futures structures that offer attractive returns. Additionally, there is scope for option strategies focused on rising implied volatility. With price action diverging from physical fundamentals, markets could be slow to react to unexpected geopolitical or macro developments. If front-month cracks or refining margins significantly widen, this disconnect between expectations and actions won’t last. That’s often when risk premiums start to adjust. For those using directionally-neutral strategies, exploring structural options may be better than outright exposure. The current data suggests that doubling down on a single directional bet isn’t the best approach. Instead, we should focus on selectively capitalizing on opportunities where potential returns exceed tail risks. We view the data not as opposing price movements but as a reminder that the futures market reflects future expectations, not past conditions. Create your live VT Markets account and start trading now.

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