Weekly Energy Update (January 12, 2023)

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

Crude oil prices continue to come under pressure on worries over economic growth, although there is some evidence that prices may be basing between $72 and $82 per barrel.

(Source: Barchart.com)

Crude oil inventories jumped 19.0 mb compared to a 3.0 mb draw forecast.  The SPR delined 0.8 mb, meaning the net build was 18.2 mb.  The unusually large build was caused by a large drop in exports, a rise in imports, and continued depressed refinery operations due to the deep cold snap late last year.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.2 mbpd.  Exports fell 2.1 mbpd, while imports rose 0.6 mbpd.  Refining activity rose 4.3% to 84.1% of capacity.  The Christmas cold snap closed in a significant level of refining activity, and the industry is slowly recovering.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Because we are starting the new year, we only have one datapoint for 2023.  The chart does show that the usual seasonal pattern was not followed last year.  This is because the average still reflects the restrictions on U.S. oil exports whereas there isn’t much of a discernable pattern to this data now that exports are allowed.

This chart shows the sharp drop and partial recovery in refining operations.

(Sources:  DOE, CIM)

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 2001.  Using total stocks since 2015, fair value is $107.08.

Market News:

  • As China reopens from its COVID-19 lockdowns, it is increasing its oil import quotas. This decision is likely bullish for crude oil prices.  China is expected to buy a significant amount of Russian crude for this reopening, which should be available as the EU price cap has reduced Russian exports.
  • OPEC+ production rose modestly in December.
  • The DOE is forecasting lower oil prices in 2023 and 2024. For 2023, it is expecting Brent to average $83 per barrel, with $78 per barrel in 2024.  Expectations of rising output are behind the lower price forecast.
  • We discussed proposed rules for U.S. refiners last year. Further analysis suggests that the costs of the new rules could lead to about a 700 kbpd loss of gasoline production as older refineries become unprofitable.  Although we could see some “grandfathering,” refining issues remain a concern.
  • As we went into winter, the worry for the EU was that a cold winter would lead to a shortage of natural gas and therefore higher prices. Instead, Europe is being blessed with a historically mild winter.  Although these mild temperatures have helped Europe avoid a price crisis this winter, it could portend a hot, dry summer, which could lift natural gas prices later this year.  Last year’s dry summer caused havoc in Europe, affecting river travel and reducing nuclear power production, which was adversely affected by the water being too warm and too scarce to cool reactors.  Although summer remains a secondary demand season for natural gas, rising temperatures will lift natural gas-fired-electricity demand and may disrupt the inventory cycle, increasing the price risk when the eventual cold winter does occur.


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