Weekly Energy Update (March 9, 2023)

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

Crude oil remains in a trading range between $72-$82 per barrel.

(Source: Barchart.com)

Crude oil inventories fell 1.7 mb compared to a 1.9 mb build forecast.  The SPR was unchanged.

In the details, U.S. crude oil production declined 0.1 mbpd to 12.2 mbpd.  Exports fell 2.3 mbpd, while imports rose 0.1 mbpd.  Refining activity rose 0.2% to 86.0% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  We have been accumulating oil inventory at a rapid pace, even without SPR sales.  This week, while there was a modest drop in inventory, we remain well above normal seasonal levels.

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 $93.31.

The Unaccounted Problem

The DOE’s weekly report is a combination of survey data and estimates.  Although traders focus on the weekly reports, the government views the monthly reports as the most accurate.  Unfortunately, the monthly reports are issued with a two-month lag. For practical purposes then, the weekly data, though imperfect, is what moves markets.

Line 13 of the petroleum supply section of the petroleum balance sheet is a plug number called “adjustment.”  It was previously called “unaccounted for crude oil” as it balances the known sources of crude oil (production, net imports, stock change) with the level of crude oil consumed by the domestic refining industry.  Lately, this number has been rising.

When the reading is above zero, it indicates that more crude oil was refined that week than was identified in the surveys or estimates.  What we know is that there is more crude oil (and/or associated products) available, but what is being missed is quite important.  The DOE argues that blending components used by refiners are possibly being included in the count of crude oil.  However, it is also possible that (a) production is higher than estimated since production in the lower 48 is an estimate, (b) imports are higher, (c) exports are lower, or (d) there is more oil being moved from inventory.  Obviously, how this unaccounted crude oil is accounted for matters a great deal.  Our guess is that it’s likely a combination of blending stocks being counted as crude oil and, perhaps, lower exports.  In any case, the monthly numbers should provide some clarity…in May.

Market News:

 Geopolitical News:

 Alternative Energy/Policy News:

  • The IEA released its CO2 emissions report for 2022. Although emissions reached a new record high, the pace of emissions growth is actually declining.
    • Carbon capture projects are continuing to develop, but the pipelines that carry CO2 to storage are unregulated at this point.
  • Agroforestry is the practice of planting trees around farm fields. The idea is that the trees will help prevent soil erosion and can provide shelter for livestock.  Government funding for increasing agroforestry is being considered.
  • The anti-ESG movement has begun to target insurance companies that may be denying coverage due to climate change concerns. The industry is pushing back, but it may be impossible for the government to force firms to cover areas adversely affected by climate issues.
  • In the early days of the auto industry, firms often attempted to vertically integrate operations. As the industry matured, it decentralized, which led to multiple firms supplying all sorts of inputs.  Due to insecurity of supply, EV makers are attempting to follow the early founders of car manufacturers by vertically integrating.
  • Volkswagen (VWAGY, $18.99) will build a battery plant in North America to take advantage of the subsidies offered by the Inflation Reduction Act. This news will likely trouble EU policymakers, who have been critical of the “buy American” elements of the act.
  • One of the problems with the transition to clean energy is that China dominates the production of the needed components. As the world devolves into blocs, the U.S.-led bloc may, in the short run, either continue to use fossil fuels or import clean energy components from China.
  • China is reportedly building “breeder” nuclear reactors. Although such reactors can be used to generate power, they also create plutonium which can be used for nuclear weapons.
  • Geothermal power is attracting attention from industry and government.
  • Environmentalist groups have been trying to curb oil and gas production by restricting pipeline expansion. Data from the DOE suggests that they were remarkably successful.  Meanwhile, oil companies are preparing the groundwork needed to acquire subsidies for investments in carbon capture.

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