Weekly Energy Update (July 20, 2023)

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

On Monday, oil prices spiked on reports that the Kingdom of Saudi Arabia (KSA) was going to extend its voluntary production cuts until year’s end.  The report was incorrect but does show the power that the news has on the oil markets.

(Source: Barchart.com)

Commercial crude oil inventories fell 0.7 mb, less than the 2.5 mb draw forecast.  The SPR was unchanged.

In the details, U.S. crude oil production was steady at 12.3 mbpd.  Exports rose 1.7 mbpd, while imports increased 1.3 mbpd.  Refining activity rose 0.6% to 94.3% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace in the first quarter, stockpiles have moved into a pattern consistent with the seasonal.  Current inventories are in line with seasonal levels.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $59.94.  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 2002.  Using total stocks since 2015, fair value is $92.96.

About the Heat:  We have been commenting on the unusually warm temperatures currently in the Northern hemisphereEurope, unaccustomed to such heat, is having a very difficult time adjusting.  In the U.S. the southern tier of states has experienced extreme heat, especially in the Southwest.  China is seeing hot weather as well.  Temperature reporting is now front and center in the media.  Although climate change is being blamed for much of it, our experience with climate is that it’s complicated.  There are two complications that are important to mention:

  • Sunspot cycles: The sun plays a major role in the earth’s climate.  Sunspots are the result of magnetic activity on the sun that causes flares and ejections from the sun’s surface.  The scientific community is divided on the impact of sunspots on climate.  Some argue that it is an important factor, others dismiss the activity as negligible.  We are not climate scientists but interested observers.  Our take is that the cycles likely amplify the normal variation.  That means that sunspot cycles probably don’t drive climate by themselves but do play a role.
    • Sunspot cycles run 22 years, from trough to trough. The current cycle will peak in 2025.  In general, increased activity tends to lead to higher temperatures.  Thus, we are in the part of the cycle that should lift global temperatures.  The current cycle isn’t unusually amplified, but its current readings exceed the peaks observed in the last cycle.

(Source:  NOAA)

The combination of elevated sunspot activity and an El Niño ENSO cycle indicates that hot weather will continue.  In the developed world, this climate condition tends to be bullish for summertime natural gas prices, as it boosts air conditioning demand and consequently, electricity consumption.  So far, U.S. natural gas production has been robust enough to keep injections on par with seasonal norms.  This factor has kept natural gas prices low.  If winters are mild, it could be bearish for natural gas prices going forward.  There have been other effects as well:

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