Weekly Energy Update (August 10, 2023)

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

Oil prices are challenging the upper end of the trading range but so far have failed to breakout above that level.

(Source: Barchart.com)

Commercial crude oil inventories rose 6.8 mb, well above the 3.0 mb build forecast.  The SPR rose 1.0 mb.

In the details, U.S. crude oil production jumped 0.4 mbpd to 12.6 mbpd.  The adjustment factor, which is a plug number to make the supply balance sheet “balance,” has been high in recent weeks.  We suspect the DOE had been undercounting barrels and thus has adjusted production higher.  Exports dropped 2.9 mbpd, while imports were unchanged.  Refining activity rose 1.1% to 93.8% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Last week’s rise partly offset the large draw from the previous week.  However, inventories remain a bit below their seasonal average.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $64.21.  Commercial inventory levels are a bearish factor for oil prices, but with the unprecedented withdrawal of SPR oil, we think that the total-stocks number is more relevant.

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 last seen in late 1985.  Using total stocks since 2015, fair value is $93.30.

Market News:

 Geopolitical News:

 Alternative Energy/Policy News:

  • Fusion power is back in the headlines. One of the keys to the scientific method is repeatability.  If an experimental outcome isn’t repeatable, it probably isn’t real.  U.S. government scientists are claiming they have achieved a net gain in a fusion reaction for the second time.  Although we doubt fusion will be commercially feasible for decades, we do note that researchers are starting on the process.
  • China continues to make inroads into global auto markets. In July, the bestselling EV in Sweden was a Chinese nameplate.
    • The Inflation Reduction Act created incentives to build EVs and key components in the U.S. One way this was structured was to deny consumers the tax credit if the car or batteries came from outside the U.S. or from nations without a free trade agreement with the U.S.  Such restrictions create incentives for evasion.  China is apparently investing heavily in South Korea’s EV battery industry, likely to create an avenue to gain access to the U.S. auto market.  South Korea has a free trade agreement with the U.S.
    • Chery Automotive, a Chinese SOE and the country’s ninth largest automaker, is teaming up with Huawei (002502, CNY, 2.38) to provide the operating system for some of its vehicles. The U.S. considers Huawei to be a potential conduit of information to the Chinese government, so it will be worth watching to see how Washington responds to nations importing these cars.
    • A price war for EVs in China has emerged, meaning it’s cheaper to purchase electric than gasoline vehicles.
    • As we have noted before, Western policymakers need to balance the goal of reducing carbon emissions with the foreign policy goal of isolating China. As this report points out, it’s a difficult tradeoff.
  • It’s likely that the early adoption phase of EVs is coming to a close. If so, it means new buyers will be more discriminating in terms of price and when making comparisons to gasoline cars.  That may mean that adoption will slow, and hybrids might become more prominent.
  • New technology could spur expanded use of geothermal power by expanding the use of horizontal drilling to create more “hot spots” to generate power.
  • As we have documented on numerous occasions, the move away from fossil fuels will entail a wholesale shift into metals. Copper, lithium, nickel, cobalt, and other metals will be needed for many of the alternatives, from windmills to solar panels to EVs.  As we have also noted, China dominates many of these metals, both in their mining and processing.  The West is trying to source these key inputs from areas free of China’s control.  However, the task is proving difficult.
  • Another recent theme we have discussed is that the joint goals of reindustrializing America (and the industrial working class) and meeting climate targets may be in conflict. Emphasizing the former will lead to higher costs, while focusing on the latter may lead to more imports which would not help the U.S. industrial sector.  Balancing these policy goals is difficult, but if the leadership sides with meeting climate goals over the goals of labor, the political costs could be large.
  • In the U.S., solar power additions to utility capacity are expected to grow sharply by year’s end. Meanwhile, China is investing in pumped storage in conjunction with wind and solar power.  Pumped storage allows power to be provided when the sun doesn’t shine and the wind doesn’t blow.
  • U.S. utilities are warning that the Biden administration’s plans to restrict carbon emissions are unworkable.

  View PDF