Weekly Energy Update (July 28, 2022)

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

It appears that oil prices are settling into a broad trading range between $125 and $95 per barrel.

(Source: Barchart.com)

Crude oil inventories fell 4.5 mb compared to a 1.5 mb draw forecast.  The SPR declined 5.6 mb, meaning the net draw was 10.1 mb.

In the details, U.S. crude oil production rose 0.2 mbpd to 12.1 mbpd.  Exports rose 0.8 mb, while imports fell 0.4 mbpd.  Refining activity declined 1.5% to 92.2% 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.  Although it is rarely mentioned, 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 $103.88.

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 $65 per barrel, so we are seeing about $30 of risk premium in the market.

Gasoline Demand

Last week, we noted that gasoline demand was weakening and that has been putting pressure on oil prices.  This week, we take a look at the number of licensed drivers in the U.S.

The data is annual, and the last available year is 2020 so we don’t know how this metric was affected by the pandemic.  On a trend basis, the number of drivers rose above trend in the early 1970s as baby boomers reached driving age.  As population growth slowed, the number of drivers fell steadily back to trend.  However, after the Great Financial Crisis, the number of drivers fell rapidly and has yet to recover.  It doesn’t appear to be the boomers.  In looking at the number of licensed drivers aged 65 and over, the growth rate is still 3% per year.  What we do find is that the number of drivers aged 29 years and younger declined over the past three years, falling 2.2% in 2020.  Social media might play a role, or the urbanization of younger households could play a role as well.

In observing the above chart, it again begs the question, “Why would anyone build additional refinery capacity if the number of drivers is falling below trend?”

 Market news:

Geopolitical news:

  • Although China is buying more Russian energy, its investments into Russia through the “belt and road” project have fallen to zero. Beijing is trying to avoid Russian sanctions.
  • One of the reasons given for President Biden’s trip to the Middle East was to reduce Chinese influence in the region. Washington fears that China is attempting to expand its footprint in the region as the U.S. slowly withdraws.  One area of interest for Beijing is Iraq.  However, China will have to navigate increasing intra-Shiite tensions.
  • Iran announced it has arrested suspected Mossad spies who were conspiring to attack Iran’s “sensitive” sites. This action occurs just as evidence appears to show that Iran’s nuclear program is expanding rapidly.
    • Iran’s foreign minister canceled a trip to the U.N. for meetings on nuclear non-proliferation. The IAEA wants Iran to turn on monitoring devices on its nuclear facilities; Iran has refused.
    • The last of the former administration’s nuclear negotiators has been replaced, reducing the odds that Iran will return to the 2015 JCPOA.
  • China and Australia have been at odds over pandemic policy. The PRC has retaliated against Australia by cutting imports.  But, as coal inventories fall, China may be forced to ease import bans on coal.
  • Cryptocurrencies have been used in cybercrime and sanctions evasion for some time. The Treasury Department is investigating whether a U.S. crypto exchange facilitated Iranian transactions in violation of sanctions.

Alternative energy/policy news:

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