Weekly Energy Update (May 11, 2023)

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

Although prices have bounced to return to the lower end of the $84/$72 trading range, recession fears continue to dominate sentiment.

(Source: Barchart.com)

Commercial crude oil inventories rose 3.0 mb compared to the forecast draw of 2.5 mb.  The SPR fell 2.9 mb, putting the total draw at 0.1 mb.

In the details, U.S. crude oil production was unchanged at 12.3 mbpd.  Exports fell 1.9 mbpd, while imports declined 0.8 mbpd.  Refining activity rose 0.3% to 91.0% 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 there was an increase, although storage levels remain below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $58.00.  Although OPEC+ is trying to stabilize the market, recession worries are clearly pressuring crude oil prices.

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 2002.  Using total stocks since 2015, fair value is $93.53.

Market News:

 Geopolitical News:

  • As China and the Kingdom of Saudi Arabia (KSA) have agreed to price oil sales in CNY, there has been a notable uptick in Chinese investment into the KSA.
  • As is often the case when sanctions are applied, firms willing to violate the sanctions (and bear the risk) can be rewarded with unusual profits. In the case of Russia, Greek firms appear to be the most active.  Indian shippers are also involved.
  • The G-7 price cap has led the Kremlin to boost taxes on energy companies. Falling production and sales have crimped tax revenue and the state has decided to raise taxes to maintain revenues.  Of course, this action will also reduce revenue for investment.
  • There is a raging debate underway surrounding the USD’s reserve currency status. Our take is that U.S. financial sanctions are encouraging nations that are fearful of sanctions to develop alternative international trade and financing arrangements.  We doubt these arrangements will totally supplant the dollar’s deeply entrenched status.  We note that Russia and India suspended talks on settling trade in INR, most likely for the simple reason that Russia has realized it would accumulate the Indian currency without a clear way to recycle the INR.

 Alternative Energy/Policy News:

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