Weekly Energy Update (July 9, 2021)

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

After rising above $76 per barrel on news of the OPEC+ impasse (see below) prices have corrected modestly.

(Source: Barchart.com)

Crude oil inventories fell 6.9 mb compared to the 4.0 mb draw expected.  The SPR fell 1.2 mb, meaning without the addition from the reserve, commercial inventories would have declined 8.0 mb.  We note the SPR is at its lowest level since October 2003.

In the details, U.S. crude oil production was unchanged at 11.1 mbpd.  Exports rose 0.1 mbpd, while imports fell 0.5 mb.  Refining activity rose 0.4%.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  We are well into the summer withdrawal season.  Note that stocks are already below the usual seasonal trough seen in early September.  A normal seasonal decline would result in inventories around 553 mb.  Our seasonal deficit is 77.1 mb.  At present, inventories are falling faster than normal.

Based on our oil inventory/price model, fair value is $59.48; using the euro/price model, fair value is $63.41.  The combined model, a broader analysis of the oil price, generates a fair value of $61.09.  Oil prices are well above fair value for all the models.  The ability of oil to maintain current levels is dependent on sentiment towards OPEC.

Rising gasoline prices can be a political problem for the White House.  However, the key isn’t just the rise in prices but the relationships to income.  Clearly, consumers prefer lower prices to higher prices, but the combination of high prices and low wage growth creates a much more serious problem.  One way we try to measure this relationship is to divide the current wage for non-supervisory workers into the national average gasoline prices.  This calculation measures how many gallons of gasoline an average worker can purchase from working one hour.

Currently, a worker can buy just over eight gallons at the average hourly wage.  The average since the mid-1960s is 8.6 gallons, so the current level is probably not enough to cause political turmoil.

Market news:

  • Alaskan crude oil production is steadily declining, which will support higher prices over time.
  • A Greenpeace activist was able to capture video comments from an Exxon (XOM, USD, 61.37) lobbyist that revealed some of the activities the company supported in Congress. The report put the company in a bad light and has triggered apologies.
  • Propane prices are soaring. It is unusual for this time of year, as demand is seasonally weak in the summer.  If supplies remain tight, it could boost crop drying costs (farmers often use propane to dry their crops before storing them in silos) and may become a crisis by winter, when rural households use the fuel for home heating.  What’s behind the rise?  Propane is a byproduct of oil refining and natural gas processing.  When production rose with the shale revolution, the propane market became oversupplied, leading the industry to build export capacity.  Now, nearly 70% of U.S. production is exported.  To reduce exports, domestic prices must exceed foreign prices.
  • As natural gas prices rise, coal demand is making a comeback.

Geopolitical news:

Alternative energy/policy news:

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