Weekly Energy Update (June 24, 2021)

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

Oil prices are moving steadily higher in an orderly fashion.

(Source: Barchart.com)

Crude oil inventories fell 7.6 mb compared to the 3.5 mb draw expected.  The SPR fell 1.7 mb, meaning without the addition from the reserve, commercial inventories would have declined 9.3 mb.  We note the SPR is at its lowest level since October 2003.

In the details, U.S. crude oil production fell 0.2 mbpd to 11.0 mbpd.  Exports fell 0.2 mbpd, while imports rose 0.2 mb.  Refining activity fell 0.4%.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  We are beginning 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 465 mb.  Our seasonal deficit is 72.2 mb.  At present, inventories are falling faster than normal.

Based on our oil inventory/price model, fair value is $55.05; using the euro/price model, fair value is $68.47.  The combined model, a broader analysis of the oil price, generates a fair value of $61.47.  Oil prices are still “rich” relative to inventory levels; recent dollar strength caused by uncertainty surrounding Fed policy has also reduced the dollar model’s fair value.

Although the economy is reopening, gasoline demand does not reflect any sort of “pent-up” demand.  Consumption is running in line with the five-year average.

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