Weekly Energy Update (May 19, 2022)

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

Crude oil prices have moved higher this week, touching technical resistance at $115 per barrel.

(Source: Barchart.com)

Crude oil inventories unexpectedly fell 3.4 mb compared to a 1.6 mb build forecast.  The SPR declined 5.0 mb, meaning the net draw was 8.4 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 11.9 mbpd.  Exports rose 0.6 mbpd, while imports rose 0.3 mbpd.  Refining activity rose 1.8% to 91.8% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  This week’s report shows a partial reversal of last week’s rise, with rising crude oil exports and increased refinery activity offsetting the continued draw from the SPR.  Seasonally, the draw begins in earnest in June.

Refinery utilization is ramping up early this year, reflecting attractive refining margins.

Seasonally, refining activity reaches its peak in early June and remains elevated into Labor Day.  We expect strong demand for product to keep refinery activity at peak levels through the summer.

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 $89.15.

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:

  • As CO2 concentrations continue to rise, it is becoming clear that mere reduction programs probably won’t be enough to slow accumulations of the gas. One area attracting attention and funding is carbon capture and storage.  This process takes the CO2 generated by various processes, captures it at the source, and sends it into underground storage or some other disposal method.  BP (BP, USD, 31.49) and Linde (LIN, USD, 371.18) announced a venture to capture greenhouse gases in Houston.
  • Another potential action is geoengineering, which can cover everything from directly cooling the earth to other forms of carbon storage. However, governments are leery of private actors or other governments essentially conducting climate experiments that may have uncertain outcomes.
  • Although commodity demand will always be cyclical, the structural demand for metals required for transitioning to EVs will likely support prices for an extended period. EVs are starting to have an impact on easing demand for gasoline.
  • EU companies are supporting a measure that would outlaw the sale of new gas and diesel vehicles by 2035. Policies such as these have a dampening effect on oil and gas investment.
  • One solution to expanding hydrogen use is to send the gas, along with natural gas, using existing natural gas pipelines.

  View PDF