Weekly Energy Update (April 14, 2022)

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

Oil prices appear to be settling into a trading range.

(Source: Barchart.com)

Crude oil inventories rose 9.4 mb compared to an unchanged forecast.  The SPR declined 3.9 mb, meaning the net build was 5.5 mb.

In the details, U.S. crude oil production is unchanged at 11.8 mbpd.  Exports fell 1.5 mbpd, while imports declined 0.3 mbpd.  Refining activity dropped 2.5% and is now 90.0% of capacity.  This week’s large and unexpected draw was due to the decline in refinery operations and exports.  We don’t expect these factors to continue.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  This week’s large build is reflected in the chart.  If this continues, we could reach the normal seasonal high in the coming weeks.  However, in this week’s report, we noted a large decline in refinery operations and exports, so we probably won’t see builds at this level in the near future.

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.

Total stockpiles peaked in 2017 and are now at levels seen in late 2008.  Using total stocks since 2015, fair value is $82.44.

With so many crosscurrents in the oil markets, we see some degree of normalization.  The inventory/EUR model suggests oil prices should be around $60 per barrel, so we are seeing about $40 of risk premium in the market.

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