Weekly Energy Update (November 10, 2022)

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

Crude oil prices appear to be building in a base in the mid-$80s.

(Source: Barchart.com)

Crude oil inventories rose 3.9 mb compared to a 0.3 mb build forecast.  The SPR declined 3.6 mb, meaning the net build was 0.3 mb.

In the details, U.S. crude oil production rose 0.2 mbpd to 12.1 mbpd.  Exports declined 0.41 mbpd, while imports rose 0.3 mbpd.  Refining activity rose 1.5% to 92.1% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  As the chart shows, we are past the seasonal trough in inventories and heading toward the secondary peak which occurs later this month.  SPR sales have distorted the usual seasonal pattern in this data.

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 last seen in 2002.  Using total stocks since 2015, fair value is $105.36.


 Market News:

 Geopolitical News:

 Alternative Energy/Policy News:

  • Cop-27 is underway this week. We won’t have much to say because we doubt anything binding will emerge.  We do note that the U.S. is proposing a system of carbon credits that can be purchased by firms.  Although the idea makes some sense, it should be noted that no accreditation process has been created, which means it could be merely a form of greenwashing.
  • Canada has ordered three Chinese firms to exit the lithium mining sector, citing national security concerns.
  • U.S. spending for wind and solar power has been weak this year.
  • Geoengineering is the process of directly acting to offset various climate issues. For example, one way to cool the planet is to inject aerosols into the upper atmosphere to reflect sunlight back into space.  Geoengineering is controversial because the potential side effects are hard to predict, and those side effects might be “levied” against those who don’t benefit from the action.  Despite the controversy, DARPA is quietly funding various projects probably because the government wants to know how they would work if we were to reach a situation where such measures became necessary.
  • There are a number of new nuclear technologies being developed. Here is a primer on molten salt reactors.
  • Researchers claim a breakthrough related to creating renewable jet fuel.
  • Similarly, researchers in Singapore note that they have made the process of pulling hydrogen out of water more efficient by using a procedure involving light. Meanwhile, researchers at Rice University have devised a way to pull hydrogen from hydrogen sulfide (rotten egg gas), which is an unwanted byproduct of desulfurization in refining and natural gas processing.
  • One of the problems with expanding solar and wind power is that it takes up lots of space and the least costly place to acquire that space is rural areas. However, residents are cooling to these facilities, worried about the impact on farming, ranching, and property values.
  • U.S. automakers are lobbying for the Treasury to widen the nations for which EV components can be imported and thus be eligible for subsidies. We suspect this is to leave room for China to participate.
  • The EU is growing increasingly upset with the Inflation Reduction Act’s EV subsidy rules that restrict payments to consumers only if they buy vehicles mostly constructed in the U.S. European automakers wanted carve outs so they could participate, but the U.S. countered with “make your own subsidies.”  We could see an EU trade retaliation, but we doubt this will change U.S. policy.
  • Last week, we noted that the EU voted to end the sale of internal combustion engines in Europe by 2035. As regulators tally up the potential job losses, there are new calls to delay that transition.

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