Weekly Energy Update (April 20, 2023)

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

After gapping last week, prices are consolidating.

(Source: Barchart.com)

Commercial crude oil inventories fell 4.6 mb compared to the forecast draw of 0.9 mb.  The SPR fell 1.6 mb, putting the total draw at 6.2 mb.

In the details, U.S. crude oil production was unchanged at 12.3 mbpd.  Exports rose 1.8 mbpd, while imports rose 0.1 mbpd.  Refining activity rose 1.7% to 91.0% 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 have since declined, putting storage levels in line with seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $56.81.  The recent actions of OPEC+ 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 $94.11.

Market News:

 Geopolitical News:

  • Saudi Crown Prince Salman announced that 4% of Saudi Aramco (2222, SAR, 34.65), worth about $80 billion, will be moved to the nation’s sovereign wealth fund. The reason is to support the Kingdom of Saudi Arabia’s economic diversification.  Although the amount doesn’t necessarily suggest a rapid move away from fossil fuels, the “direction of travel” suggests less investment in oil and gas, and more in other parts of the economy.
  • The IEA admits that the price cap on Russian oil has been violated. Russian oil exports are now exceeding prewar levels with nearly all of the oil flows going to China and India.  Russia is also apparently selling oil in the Far East that is being exported by tanker, but this voyage is short enough to avoid insurance, which means that buyers can violate the price cap.  The U.S. is warning that it will begin cracking down on this practice.
  • Russia has surprisingly little domestic oil storage. Because of this lack of storage capacity, it must sell most of what it produces.  The country has announced that it will build new storage facilities which will give it more flexibility for timing sales.
  • China is proposing new natural gas pipelines from Kazakhstan to diversify its sources of the product.
  • Given China’s dominance in renewable energy and EV components, Chinese companies are often participants in foreign investment projects. However, due to deteriorating relations between China and the West, political resistance to these projects is growing.

 Alternative Energy/Policy News:

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