Weekly Energy Update (February 3, 2022)

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

Since troughing in early December, oil prices have been steadily rising due to tightening supplies.  We are approaching the highs set in November.

(Source: Barchart.com)

Crude oil inventories unexpectedly fell 1.0 mb compared to a 1.8 mb build forecast.  The SPR declined 1.9 mb, meaning the net draw was 2.9 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 11.5 mbpd.  Exports fell 0.4 mbpd while imports rose 0.8 mbpd.  Refining activity fell 1.0%.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  This week’s report shows a pattern more consistent with average and less with last year.  Last year, we had a sharp drop in stockpiles in a period where inventories usually accumulate.  So far, it looks like we will see inventories rise rather than decline.

Based on our oil inventory/price model, fair value is $69.62; using the euro/price model, fair value is $53.34.  The combined model, a broader analysis of the oil price, generates a fair value of $61.72.  Current prices exceed our model projections, but price momentum is likely to push prices higher.

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