Weekly Energy Update (March 30, 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.  Recent weakness was exacerbated by funds that sold out of long crude oil positions.  Prices have recovered to the lower end of the previous trading range.  We will see if this acts as resistance.

(Source: Barchart.com)

Crude oil inventories plunged 7.5 mb compared to the forecast of a 1.5 mb build.  The SPR was unchanged.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports fell 0.3 mbpd, while imports dropped 0.8 mbpd.  Refining activity jumped 1.7% to 90.3% 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 first slowed and then declined this week due to the rise in refinery activity.  Levels are nearing seasonal norms, which should relieve the bearish pressure on the market.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $54.26.  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 $93.58.

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