Weekly Energy Update (April 27, 2023)

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

After gapping two weeks ago, oil prices have filled the gap on worries about the global economy.

(Source: Barchart.com)

Commercial crude oil inventories fell 5.1 mb compared to the forecast draw of 1.5 mb.  The SPR fell 1.0 mb, putting the total draw at 6.1 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports rose 0.2 mbpd, while imports rose 0.1 mbpd.  Refining activity rose 0.5% to 91.3% 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 have since declined, putting storage levels below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $58.47.  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 2002.  Using total stocks since 2015, fair value is $94.82.

Market News:

  • As U.S. oil production rises, associated natural gas production is also rising steadily, leading to a glut. This supply situation is keeping U.S. prices low and is encouraging the expansion of American LNG capacity.  However, higher interest rates and permitting issues are acting to constrain projects, thus leading to persistently low prices of natural gas.
  • China’s large SOE refiners are getting privileged access to cheap Russian crude oil.
  • Natural gas finds in the eastern Mediterranean raised hopes that nations in that region could profit from these discoveries. In addition, there was optimism that this gas could pave the way for improving previously fraught relations between states.  However, on the latter front, only modest changes have emerged.

 Geopolitical News:

 Alternative Energy/Policy News:

(Source: IEA)

  • As the chart shows, sales are lifting, with the bulk of those occurring in China. The IEA reports that 20% of car sales this year will be EVs.  Second, China is beginning to export EVs which could roil global car markets.

  • The expansion of EV sales will begin to destroy oil demand by the end of the decade.

(Source: IEA)

  • Even under existing policies, 5.3 mbpd of demand will be lost to electrics. This sort of information will tend to dampen oil investment, and, paradoxically, could be bullish for crude oil.
  • A battery is stored energy. We are used to thinking about batteries as a chemical process, but in reality any sort of energy storage that can be used later is technically a battery.  That energy can also be kinetic.  Renewable energy sources are notorious for creating excess electricity as particularly sunny or windy days can create more energy than is needed at any given time.  The startup Energy Vault is building facilities in Texas and Shanghai that will lift 24-ton blocks of dirt during periods of excess electricity, and then lower them to spin turbines to generate electricity when it is needed.
  • We continue to note news reports on geoengineering. Although controversial, as climate problems emerge, the use of this technology to address them will become attractive.
  • The EU is adjusting rules to encourage the use of sustainable fuels in aviation.

  View PDF