Crude oil and product inventory

Oil companies hold millions of barrels in tanks, pipelines, ships and refineries, and the price of every barrel moves daily. How that inventory is costed decides how much of a price rise or fall shows up in profit, and when. This guide covers cost formulas, the effect of rising and falling prices, write-downs and reversals, linefill, refinery joint products, trading inventory and the replacement cost profit measures that integrated companies use.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 4 minute read.

Short answer

Crude oil inventory, along with refined products and LNG, is measured under IAS 2 at the lower of cost and net realisable value. Cost uses FIFO or weighted average, never LIFO, and for producers includes the cost of production, including depletion. When oil prices fall below cost, inventory is written down, and the write-down is reversed if prices recover. Oil that must stay in pipelines and tanks for them to operate, linefill and tank bottoms, is often treated as property, plant and equipment, and commodity broker-traders can measure inventory at fair value less costs to sell. In this guide's example, the same sale of a million barrels shows a profit of US$ 30 million under FIFO, 20 million under weighted average, and 10 million on the replacement cost measure many integrated companies report.

At a glance

Measured at
Lower of cost and NRV
Cost formula
FIFO or weighted average, no LIFO
Falling prices
Write down to NRV
Recovery
Write-down reversed, up to cost
Linefill
Often property, plant and equipment
Traders
Fair value less costs to sell allowed
Crude oil and product inventoryMeasured at: Lower of cost and NRV; Cost formula: FIFO or weighted average, no LIFO; Falling prices: Write down to NRV; Recovery: Write-down reversed, up to cost; Linefill: Often property, plant and equipment; Traders: Fair value less costs to sell allowed.KEY FACTS AT A GLANCECrude oil and product inventoryMeasured atLower of cost and NRVCost formulaFIFO or weighted average,no LIFOFalling pricesWrite down to NRVRecoveryWrite-down reversed, upto costLinefillOften property, plant andequipmentTradersFair value less costs tosell allowedTax BakersCrude oil and product inventoryMeasured at: Lower of cost and NRV; Cost formula: FIFO or weighted average, no LIFO; Falling prices: Write down to NRV; Recovery: Write-down reversed, up to cost; Linefill: Often property, plant and equipment; Traders: Fair value less costs to sell allowed.KEY FACTS AT A GLANCECrude oil and product inventoryMeasured atLower of cost and NRVCost formulaFIFO or weighted average, no LIFOFalling pricesWrite down to NRVRecoveryWrite-down reversed, up to costLinefillOften property, plant and equipmentTradersFair value less costs to sell allowedTax Bakers
Key facts at a glance, as set out in this guide.

What goes into the cost of crude oil inventory?

For a producer, the cost of oil in storage includes production costs, depletion of the field, transport to the storage point and an allocation of production overheads. For a refiner, crude bought from others is costed at purchase price plus freight, insurance and duties, and refined products carry the cost of crude plus refining costs. Storage costs after the oil reaches its intended location, administration and selling costs are expensed. See IAS 2 inventories.

Which cost formula is used, and why does it matter?

IAS 2 allows FIFO or weighted average for interchangeable items such as crude; LIFO is prohibited. In a rising market, FIFO matches older, cheaper barrels against today's sales prices, so profit includes an inventory holding gain. Weighted average dampens the effect. See FIFO and weighted average.

Crude oil inventory: the same sale on three measures

A refiner holds 1 million barrels bought at US$ 60, buys another 1 million at 80, then sells 1 million barrels of products for the equivalent of 90 a barrel. For simplicity, refining costs are ignored.

Profit on the same sale under each measure (US$ million)Profit on the same sale under each measure (US$ million)30FIFO20Weighted average10Replacement costIFRS cost formulaNon-IFRS measure
FIFO profit includes a holding gain in a rising market.
US$ millionFIFOWeighted averageReplacement cost (non-IFRS)
Sales909090
Cost of sales(60)(70)(80)
Profit302010
Inventory left, per barrel8070Not a balance sheet measure

The underlying refining margin, sales price less the current cost of crude, is 10 million. Under FIFO the reported profit of 30 million includes an inventory holding gain of 20 million. That is why integrated oil companies report a replacement cost or current cost of supplies profit alongside IFRS profit, excluding holding gains and losses. Under IFRS 18, from 2027, such measures used in public communications are likely to be management-defined performance measures reconciled in the notes.

When is crude oil inventory written down?

When its net realisable value, the expected selling price less costs to complete and sell, falls below cost. If inventory costing US$ 80 a barrel can be sold for only 64 net at the year end, it is written down by 16 a barrel. If prices recover the next year and net realisable value rises to 74, the write-down is reversed by 10, to the lower of cost and the new net realisable value. Crude held for refining is not written down if the products it will be made into are expected to sell at or above cost; if they are not, replacement cost of the crude may be the best evidence of its net realisable value. See net realisable value.

How are linefill and tank bottoms treated?

A pipeline or storage tank cannot operate without a minimum volume of oil permanently inside it. Many companies treat this linefill and tank bottoms as property, plant and equipment rather than inventory, because it is not held for sale and is needed to use the asset. It is measured at cost and not depreciated if it can be recovered in full when the asset is retired, but is tested for impairment with the related asset. The policy should be disclosed, because it moves a material amount out of inventory and out of the price exposure of working capital.

How are refinery joint products costed?

A refinery turns one barrel of crude into several products, such as petrol, diesel, jet fuel and fuel oil, at once. Joint costs are allocated between products on a rational and consistent basis, usually their relative sales values at the point they separate. By-products of small value are measured at net realisable value and deducted from the cost of the main products.

Can trading inventory be held at fair value?

Yes, for commodity broker-traders. Inventory held by a trader principally to sell in the near future and profit from price fluctuations or a trader's margin can be measured at fair value less costs to sell, with changes in profit or loss. Integrated companies often apply this to their trading books while measuring refinery and production inventory at the lower of cost and net realisable value. Forward contracts to buy and sell oil in the trading book are derivatives under IFRS 9, not own-use contracts. See commodity hedging and own use.

How does US GAAP differ?

US GAAP still permits LIFO, which many US refiners use, so that cost of sales reflects recent prices; it measures LIFO inventory at the lower of cost or market, and write-downs are not reversed in later annual periods. See IAS 2 vs ASC 330 and oil and gas accounting.

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Questions people ask

Can LIFO be used for crude oil inventory under IFRS?

No. IAS 2 permits FIFO or weighted average only.

Can a crude oil inventory write-down be reversed?

Yes. If net realisable value recovers, the write-down is reversed, up to the original cost.

Is linefill inventory or property, plant and equipment?

Many companies treat it as property, plant and equipment, because it is needed to operate the pipeline or tank and is not held for sale.

What is replacement cost profit?

A non-IFRS measure that charges cost of sales at current crude prices, removing inventory holding gains and losses from profit.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 2 Inventories

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

IAS 2IAS 2 inventories explainedIAS 2Net realisable value and inventory write-downsOil and gasOil and gas accounting: the key IFRS issues

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This guide is general information. It is not tax or legal advice for your situation.