Weekly Energy Update (May 5, 2022)

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

It appears oil prices are attempting to create a trading range between $105 to $95 per barrel.  That may hold until the SPR release is complete.

(Source: Barchart.com)

Crude oil inventories unexpectedly rose 1.3 mb compared to a 0.2 mb draw forecast.  The SPR declined 3.1 mb, meaning the net draw was 1.8 mb.

In the details, U.S. crude oil production was unchanged at 11.9 mbpd.  Exports fell 0.1 mbpd, while imports rose 0.4 mbpd.  Refining activity slipped 1.9% to 88.4% of capacity.  The decline in refinery operations is a surprise and will likely be reversed in the coming weeks.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  This week’s report is consistent with last year.  Also, note that in the average data, we are at the point where the seasonal build period has ended.  Over the next few weeks, we will see if we follow the average path or track last year.

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.

Total stockpiles peaked in 2017 and are now at levels seen in late 2008.  Using total stocks since 2015, fair value is $85.90.

With so many crosscurrents in the oil markets, we see some degree of normalization.  The inventory/EUR model suggests oil prices should be around $60 per barrel, so we are seeing about $40 of risk premium in the market.

Market news:

 Geopolitical news:

 Alternative energy/policy news:

  • Nuclear power has a bad reputation. Three disasters—Chernobyl, Three Mile Island, and Fukushima—have made nuclear power unpopular.  Despite this reputation, it is undisputable; nuclear power emits no greenhouse gases.  Environmentalists are noticing that when nuclear power plants close, they tend to be replaced with “dirty” fuels.  We note Gov. Newsom (D-CA) is apparently “reconsidering” closing the Diablo Canyon nuclear plant, scheduled for closure in 2025.
  • In China, we are seeing a resurgence in coal consumption and plans for nuclear power expansion. The country is also the world’s largest importer of LNG.  Solar installations appear to be lagging.
  • Temperatures in India have been reaching unbearable levels, triggering rising electricity demand. This factor is lifting the demand for coal.
  • Hydrogen has been something of the “Holy Grail” of clean fuels. Having no carbon associated with the gas, it is very clean and efficient.  Nevertheless, producing it can be problematic.  “Green” hydrogen is usually made from electrolysis from clean energy, e.g., solar or wind.  “Blue” hydrogen is usually derived from natural gas.  “Gray” hydrogen comes from using electrolysis from conventional electricity.  However, less talked about is the lowest cost “gold” hydrogen.  This gas occurs naturally and can be captured similarly to natural gas.  It isn’t clear how much gold hydrogen is available, but exploration efforts are beginning.
  • The major U.S. political parties are forced coalitions. They house disparate groups that may not have many characteristics in common.  The GOP is generally considered more friendly to extractive industries, but there is an emerging Conservative Climate Caucus that wants to modify the perception of Republicans on environmental issues.  Some of this new group could be based on age; younger voters tend to be more supportive of climate issues.
  • Rising input costs are hurting the earnings of battery manufacturers.
  • The U.S. solar power industry is divided between manufacturers, who want tariffs on Chinese imports, and installers, who want to have the foreign product available. The lack of policy clarity is “freezing” the industry.  A number of senators are calling for an end to the solar study.
  • Fidelity (FNF, USD, 39.29) has decided to support bitcoin in 401(k) accounts. The company faces criticism due to the massive energy consumption that occurs in the mining process.
  • Although ethanol is considered “green” because it is made from renewable inputs, the process of fermentation creates a surprising level of CO2. This report discusses efforts to capture the gas and pipeline it to disposal sites.  Interestingly enough, plans to build pipelines for the gas have struggled to get approved.
  • The Niskanen Center argues that tax credits for EVs are targeting the wrong drivers. Instead of a system that seems to be attractive to higher-income drivers (who tend to opt for greater fuel efficiency anyway), the think tank argues the incentive should target high-mileage drivers.  In other words, the EV credits should go to drivers who have long commutes.
    • Volkswagen (VWAGY, USD, 21.54) announced its EVs are “sold out.”
  • Manchin (D-WV) is considering supporting carbon tariffs on high carbon imports.
  • Entrepreneurs are working on “green” cement. Cement is a surprisingly high contributor to greenhouse gases.

(Source:  Axios)

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