Weekly Energy Update (April 28, 2022)

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

It appears oil prices are attempting to create a trading range between $105 to $95 per barrel.  That may hold until the SPR release is complete.

(Source: Barchart.com)

Crude oil inventories unexpectedly rose 0.7 mb compared to a 0.3 mb draw forecast.  The SPR declined 2.9 mb, meaning the net draw was 2.2 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 11.9 mbpd.  Exports rose 2.1 mbpd, while imports declined 0.2 mbpd.  Refining activity increased 1.0% and is now 91.0% of capacity.  This week’s large and unexpected draw was mostly due to rising exports, although the increase in refinery operations contributed to the draw.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  This week’s report is consistent with last year; also, note that in the average data, we are at the point where the seasonal build period has ended.  Over the next few weeks, we will see if we follow the average path or track last year.

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 $85.50.

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.

Market news:


Geopolitical news:

Alternative energy/policy news:

  • President Biden entered office with an aggressive climate agenda. As energy prices have soared, he has been steadily retreating from the position.  The withdrawal makes political sense, but it is not without costs.  Polls suggest he is rapidly losing support among younger voters, which may adversely affect his party in November’s midterms.
  • We have reported that financial firms have been restricting lending activity to fossil fuel companies. That resistance may be starting to wane.
  • Until batteries become reliable (and cheap) enough to store wind and solar power during generation periods when the winds are calm and the sun isn’t out, backup capacity tends to undermine the business case for alternative energy. Even though the administration is trying to streamline the process for making batteries, much of the mineral processing remains in China and is a potential block to expanding battery capacity.  The EU faces similar capacity shortages.
  • Modular nuclear reactors are a potential solution to filling the electricity gap as EVs expand.
  • While Germany’s decision to end the use of nuclear power is considered a major mistake, there is little evidence the country is considering changing its stance.
  • Geothermal energy is clean and abundant, but the initial investment can be daunting. There is a movement to use abandoned oil wells already drilled to get a “head start” on tapping this source.
  • Although Mexico’s President Andrés Manuel López Obrador remains friendly to traditional oil, he has recently nationalized the lithium industry. It’s hard to see how the move will support Mexico’s ability to expand this resource.
  • The U.S. solar panel industry is seeking protection from Chinese imports. The installers are opposing these efforts.
  • Canada has set up an exchange for carbon credits. Activity is expanding rapidly.

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