Weekly Energy Update (August 11, 2022)

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

Prices have broken support but appear to be basing around $88 per barrel.

(Source: Barchart.com)

Crude oil inventories rose 5.5 mb compared to a 1.0 mb draw forecast.  The SPR declined 5.3 mb, meaning the net build was 0.2 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.2 mbpd.  Exports fell 1.4 mb, while imports declined 1.2 mbpd.  Refining activity jumped 2.3% to 94.3% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Clearly, this year is deviating from the normal path of commercial inventory levels.  The fact that we are not seeing the usual seasonal decline is a bearish factor for oil prices.

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 2004.  Using total stocks since 2015, fair value is $102.55.

With so many crosscurrents in the oil markets, we are beginning to see some degree of normalization.  The inventory/EUR model suggests oil prices should be around $64 per barrel, so we are seeing about $24 of risk premium in the market.

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