Weekly Energy Update (April 13, 2023)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Crude oil gapped higher in early April on reports that OPEC+ was cutting production targets.  It has held those gains and is now moving above chart resistance at $82 per barrel.

(Source: Barchart.com)

Commercial crude oil inventories rose 0.6 mb compared to the forecast draw of 1.7 mb.  The SPR fell 1.6 mb, putting the total draw at 1.0 mb

In the details, U.S. crude oil production rose 0.1 mbpd to 12.3 mbpd.  Exports plunged 2.5 mbpd, while imports dropped 0.9 mbpd.  Refining activity declined 0.3% to 89.3% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined for two weeks.  The mostly steady report for last week puts stockpiles near seasonal norms.  Past history would suggest there will be mostly steady inventory levels into early June.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $55.36.  The actions of OPEC+ this week are clearly designed to prevent this sort of price from emerging.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2001.  Using total stocks since 2015, fair value is $93.33.

Market News:

 Geopolitical News:

  • The U.S. has sent the USS Florida, a guided missile submarine, to the Persian Gulf region. The U.S. often has a naval presence in this region, but this sub could be viewed as a show of force against Iran.
  • The U.S has been restricting China’s ability to import semiconductor chips and the equipment for fabricating them. China is considering retaliation in the form of restricting rare earth exports.  Rare earths are critical in technology and alternative energy.
  • Last week, we noted that China hosted a meeting between diplomats from the Kingdom of Saudi Arabia (KSA) and Iran. Both sides agreed to resume flights between the two Middle Eastern nations.
  • Officials from the KSA are meeting in Yemen for talks with rebel groups. One potential outcome from the recent détente between Iran and the KSA could be a ceasefire in the long-running civil war in Yemen.
    • Graham (R-SC) had a “productive meeting” with Crown Prince Salman this week. Graham has been critical of the crown prince in the past, so the meeting might signal something of a thaw in U.S./KSA relations.
  • Although the U.S. political class is moving decidedly against China, the business class is clearly loath to break ties. We think that eventually businesses will be forced to choose.
  • Recently, we reported that schoolgirls in Iran were being poisoned in their schools. Apparently, the poisonings have continued.  It isn’t clear if Iran is facing a dissident movement within Shia Islam, or if the acts are being perpetrated by radical Sunni groups.  We note that the Islamic State and Taliban groups oppose education for women and so these acts may be being perpetrated by groups outside of Iran.
  • Iran is apparently in talks with China and Russia to provide components for missile fuel. Russia is attempting to acquire ammonium perchlorate which is used in solid fuel propellants in missiles.  If Iran supplies the component, it will surely face additional sanctions, but at the same time, Tehran may be reluctant to sell the fuel to Russia because it has its own needs for missile fuel.
  • Recent leaks of classified materials indicate that Russian hackers were targeting Canadian pipelines. Although the hackers claimed success in penetrating the networks, there were no reports of disruptions from cyberattacks.

 Alternative Energy/Policy News:

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