Weekly Energy Update (March 23, 2023)

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

Crude oil decisively broke its recent $72-$82 per barrel trading range.  Problems in the banking sector are raising fears of a global economic slowdown.  Classic technical analysis would suggest that the former support at $72 will become resistance; in other words, this level will need to be overcome if prices are going to rise.

(Source: Barchart.com)

Crude oil inventories rose 1.1 mb compared to a forecast of a 1.8 mb draw.  The SPR was unchanged.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.3 mbpd.  Exports fell 0.1 mbpd, while imports were steady.  Refining activity rose 0.4% to 88.6% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections have slowed.  Levels remain above seasonal norms, but with refinery activity starting to ramp up for summer, we should see some declines in the coming weeks.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $51.90.  Although we think there is enough geopolitical risk in the world to prevent a decline to this level, it does suggest that the oil market is dealing with rather weak fundamentals.

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.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2001.  Using total stocks since 2015, fair value is $92.66.

Market News:

 Geopolitical News:

 Alternative Energy/Policy News:

  • China’s $7.8 billion battery plant in Hungary, supported by the Orbán government, is facing strong local opposition. Meanwhile, South Korea is implementing a $35 billion battery investment program in an effort to catch up with China.
  • Europe is taking steps to revive mining to reduce its reliance on Chinese EV materials. Over the past 40 years, raw material production has shifted to developing economies since the developed economies have shunned these activities for either cost or environmental reasons.  However, as supply risks rise, there has been a renewed effort to find more reliable sources of these products.  The U.S. is engaging in similar efforts.
    • We note that Glencore (GLNCY, $10.91) is no longer the largest cobalt miner, losing that rank to China’s CMOC (603993, CNY, 5.70).
  • We have been monitoring geoengineering for several years. Geoengineering can take many forms, but essentially it involves using various techniques to directly affect temperature or the climate.  The practice is controversial as there are concerns that a private actor could deploy a measure that could have adverse effects on some parties who then have little recourse to respond.  Unintended consequences could result.  MIT has reported that the U.K. performed an experiment with a geoengineering delivery system that had limited oversight.
  • There is growing interest in using geothermal power as a battery.
  • A surge in lithium production has led to lower costs for EV producers. Although lithium demand remains strong, prices have been falling since January.
  • ESG investing has become controversial. Blackrock (BLK, $638.57) is attempting to manage the competing sides of the debate.

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