Weekly Energy Update (July 27, 2023)

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

Oil prices have moved into the upper end of the trading range.

(Source: Barchart.com)

Commercial crude oil inventories fell 0.6 mb, less than the 2.0 mb draw forecast.  The SPR was unchanged.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports rose 0.8 mbpd, while imports declined 0.8 mbpd.  Refining activity fell 0.9% to 93.4% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Current inventories are falling but at a slower-than-normal pace.  If we follow the seasonal pattern, stockpiles should continue to fall into mid-September.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $60.14.  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 $93.10.

Market News:

 Geopolitical News:

Alternative Energy/Policy News:

  • When China restricted Japan’s access to rare earth minerals in 2010, it highlighted China’s dominance in this market. In reality, rare earths are not all that rare.  What allowed China to dominate the market was that the mining and processing of these minerals tend to be disruptive.  China was simply willing to suffer the environmental costs.  But as other nations realized the vulnerability they faced from Beijing’s whims, we have seen a concerted effort to build mining capacity outside of China.  This report on Sweden’s mining activity is an example.
  • The Inflation Reduction Act (IRA) provides subsidies to firms building clean energy facilities in the U.S. Foreign firms have been aggressively taking advantage of the opportunity.  This outcome suggests foreign firms are participating in the reindustrialization of the U.S.
  • One of the favorable factors of markets is that prices signal to both consumers and producers to adjust their behavior. The decentralized characteristic of markets creates efficiencies that central planning, to date, hasn’t been able to duplicate.  The EV revolution will increase demand for copper, and as copper prices have increased, producers are looking for ways to use less copper.  Most of the adjustments, so far, have been in modest engineering changes.  We still expect copper demand to be strong in the coming years, but the simple extrapolation of demand from current use is probably overestimating future consumption.
  • The Greens in Germany are part of the currency ruling coalition. Ostensibly an environmental party, it has moderated its positions over the years to increase its political power.  However, true to its roots, it has supported an aggressive policy stance of replacing boilers in German homes with heat pumps.  The plan has turned out to be very unpopular and may undermine the current coalition.
  • EVs are fair weather vehicles, as it turns out. It’s well known that extreme cold weather reduces battery range.  Evidently, hot weather has an even greater negative effect.
  • The environmental movement is plagued by a purity constraint as virtually every technical solution to an environmental problem will create an adverse impact on some part of the ecosystem. A recent lawsuit against the EPA argues that biofuels likely violate the endangered species act.

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