Weekly Energy Update (August 17, 2023)

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

Oil prices did break out of the trading range but were unable to maintain the uptrend.  We suspect the recent pullback is corrective in nature and not the start of a major selloff.

(Source: Barchart.com)

Commercial crude oil inventories fell 6.0 mb, much lower than the 2.3 mb build forecast.  The SPR rose 0.6 mb which puts the net build at 5.4 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.7 mbpd.  Reported production has been rising, but there are also reports arguing that further increases may be difficult.  Exports rose 2.2 mbpd, while imports rose 0.5 mbpd.  Refining activity rose 0.9% to 94.7% of capacity, the highest level since early June.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  The last decline is consistent with seasonal patterns.  Inventories remain a bit below their seasonal average.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $66.20.  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 $93.89.

Market News:

 Geopolitical News:

 Alternative Energy/Policy News:

  • In the extraction process, it is not unusual for byproducts to be produced. When mining for copper, nickel or silver is also often extracted.  When drilling for oil, natural gas is often found as well.  Lithium is often a byproduct of oil and gas drilling, and with lithium prices rising and demand strong, oil companies are starting to try to capture lithium in the drilling process.  Where does the lithium come from?  When drilling for oil or gas, a normal byproduct is salt water mixed with oil, and this brine contains lithium.
  • There are two competing technologies for lithium-ion batteries. One uses lithium, nickel, manganese, and cobalt, and another uses lithium, iron, and phosphate.  This article is a primer on the two different types.
  • In the U.S., EV sales remain healthy, but there is growing dissatisfaction with the charging infrastructure. Without resolution, this could stall sales.
  • Although Mongolia is landlocked, as we noted in a recent report, it has been trying to foster an independent foreign policy away from Russia and China. The U.S. is supporting Mongolian exports of rare earths.  It will be interesting to see if China begins to interfere with the trade.
  • In Brazil, BYD (BYDDY, $66.43) is taking control of a large Ford (F, $12.30) auto factory, providing further evidence that China’s EV industry is making global inroads.
  • Last week, we noted that China was using pumped storage for energy production. Beijing has announced a new pumped storage project in the Gobi Desert.
  • The buildout of electricity transmission lines is a key element in expanding renewable energy. Often, such projects pit environmentalists against one another.
  • Supermajor oil companies are becoming interested in direct air capture, which would pull carbon out of the atmosphere directly.
  • A Montana judge ruled that the state’s approval of fossil fuel projects was unconstitutional because environmental factors were not taken into account. Although the news is getting lots of attention, the ruling was rather narrow and may not set a precedent.
  • There is an underlying tension between rapidly building out the alternative energy industry and encouraging unionization. The UAW is pressing for union membership, whereas firms are hoping to avoid organized labor.

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