Weekly Energy Update (August 24, 2023)

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

Oil prices continued to weaken this week, although there are technical signs that prices might be consolidating at these elevated levels.

(Source: Barchart.com)

Commercial crude oil inventories fell 6.1 mb, lower than the 2.5 mb draw forecast.  The SPR rose 0.6 mb which puts the net build at 5.5 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.8 mbpd.  The DOE is projecting higher U.S. output on rising well productivity.  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.  Over the past few weeks, the decline in stockpiles is consistent with seasonal patterns.  Inventories remain a bit below their seasonal average.  Based on the seasonal pattern, inventories should start to rise after mid-September.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $68.13.  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 $94.46.

Market News:

Geopolitical News:

 Alternative Energy/Policy News:

  • There is a school of thought within the environmental movement that is Malthusian; simply put, they hold reservations that technology can resolve environmental problems and instead press for less economic growth. The rising opposition to carbon capture reflects this thinking, as does the continued rejection of potential mining sites due to environmental concerns.  Although we agree the concerns are real, the energy transition rests on expanding the availability of key metals, such as copper, lithium, nickel, etc.
  • The Inflation Reduction Act is a year old. The act’s main goal is to speed up the U.S.’s energy transition.  At the same time, it is also trying to boost U.S. jobs and secure mineral supply chains.  There is great resistance to performing the mining necessary in the U.S. to replace fossil fuels, which means the Biden administration is left with cultivating supply sources in Africa.
  • Research from Bloomberg projects that EVs will reduce gasoline demand dramatically by 2040.
  • Although Brazil’s President Lula has openly supported alternative energy projects, he is also supporting new oil exploration. The support for fossil fuel exploration has divided his political coalition.
  • One of the more difficult parts of the energy transition involves industrial processes, especially tied to metal refining. There is work being done in the area of “thermal batteries,” which essentially heats bricks to high temperatures and then uses the heat from said bricks to engage in metals processing. If renewable sources of electricity are used, thermal batteries would be mostly clean, and since the bricks can hold heat for a long period of time, this means the intermittency from wind or solar might be workable.
  • Shipping companies are starting to test the use of sails for ocean-going vessels as a way to reduce fuel consumption.
  • Chile, which has the world’s largest lithium reserves (and is the second largest producer), has revamped its investment procedures. This change has led to an influx of firms bidding for access to the country’s lithium deposits.
  • U.S. uranium production rose modestly in 2022 but production levels remain very low. However, the U.S. and EU are taking steps to find new sources of uranium for power production.
  • Although China continues to dominate rare earths mining and processing, consumers of these metals are making efforts to diversify. Investment in processing is occurring in Vietnam.

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