Weekly Energy Update (March 3, 2022)

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

Oil prices are moving sharply higher as sanctions expand against Russia.

(Source: Barchart.com)

Crude oil inventories unexpectedly fell 2.6 mb compared to a 2.5 mb draw forecast.  The SPR declined 2.4 mb, meaning the net build was 5.0 mb.

In the details, U.S. crude oil production was unchanged at 11.6 mbpd.  Exports rose 1.1 mbpd, while imports dropped by the same amount.  Refining activity rose 0.3%.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  This week’s report shows we are “splitting the difference” between last year’s plunge and the usual rise seen in the 5-year average.  Given all the turmoil in markets, it is more likely that inventories hold steady in the coming weeks until refineries begin to ramp up for summer driving.

Based on our oil inventory/price model, fair value is $70.37; using the euro/price model, fair value is $54.44.  The combined model, a broader analysis of the oil price, generates a fair value of $63.09.  Current prices are being driven by ESG and geopolitics, so the usual impact of inventory and the dollar has been overwhelmed.  However, the analysis shows that any sort of normalization will likely lead to lower oil prices; presumably, “normalization” may not return any time soon.

 Market news:

  • As part of the war response, the U.S. and other nations announced a 60 mb oil release from SPRs. We are not sure this action will have much of a positive impact (it hasn’t thus far).  As we noted last week, we expect the correlation between price and inventory to flip to positive in the coming weeks as consumers scramble to secure supply.  One of the primary reasons for creating SPRs was to discourage hoarding.  If consumers believe the SPRs can provide oil in a shortfall, they should be confident enough to avoid hoarding.  Unfortunately, the U.S. has been steadily releasing oil from the U.S. SPR, so the psychological impact of the news has dampened.

(Sources:  DOE, CIM)

  • This chart shows the weekly level of the SPR since August 1982. The current level, at 580 mb, is the lowest in nearly 20 years.
  • Divestment efforts from fossil fuels continue, which will tend to reduce funds available for investment.

Geopolitical news:

Alternative energy/policy news:

(Source:  Axios)

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