Weekly Energy Update (June 16, 2022)

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

Crude oil prices continue to rise in an orderly fashion.

(Source: Barchart.com)

Crude oil inventories rose 2.0 mb compared to a 2.0 mb draw forecast.  The SPR declined 7.7 mb, meaning the net draw was 5.8 mb.

In the details, U.S. crude oil production rose from 0.1 mbpd to 12.0 mbpd.  Exports rose 1.5 mbpd, while imports rose 0.8 mbpd.  Refining activity fell 0.5% to 93.7% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  This week’s report is consistent with the average pattern.  Note the average pattern shows declines into September.

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 seen in 2005.  Using total stocks since 2015, fair value is $97.79.

With so many crosscurrents in the oil markets, we see some degree of normalization.  The inventory/EUR model suggests oil prices should be around $65 per barrel, so we are seeing about $50 of risk premium in the market.

Natural Gas Update:

As we head into summer, we wanted to look at current natural gas fundamentals.  First, on a rolling 12-month basis, supply exceeds consumption.

The improved supply situation for the U.S. is partly due to rising production; however, we have also seen lower exports.  Given the U.S. promises to Europe, we look for exports to rise as the summer wears on.

For now, inventories are balanced as we move into summer.  We are in the injection season and thus, expect inventories to rise into November.

This model compares working storage to the estimated normal level.  We will be watching this model closely over the summer.

Market news:

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 Alternative energy/policy news:

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[1] For background on this issue, see here and here.