Weekly Energy Update (November 11, 2021)

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

After pulling back from $85 per barrel, the market made another assault on the price level, but that level is proving to give strong resistance.

(Source: Barchart.com)

Crude oil inventories rose 1.0 mb compared to a 2.6 mb build forecast.  The SPR declined 3.1 mb, meaning the net draw was 2.1 mb.

In the details, U.S. crude oil production was unchanged at 11.5 mbpd.  Exports rose 0.1 mbpd, while imports fell 0.1 mbpd.  Refining activity rose 0.4%.  This build season usually ends in mid-November.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  We are nearing the end of the autumn build season.  Note that stocks are significantly below the usual seasonal trough.  Our seasonal deficit is 71.9 mb.

Based on our oil inventory/price model, fair value is $63.15; using the euro/price model, fair value is $58.34.  The combined model, a broader analysis of the oil price, generates a fair value of $60.30.  Across all models, the current price of oil is overvalued.  Although supply concerns, especially the lack of response from producers in the light of high prices, is a bullish factor, it is also arguable that prices have mostly discounted (or perhaps more than discounted) the impact of this issue.  So far, the market is consolidating in a range between $80 to $85 per barrel.  Breaking out from that range may require a weaker dollar or falling stockpiles.

The SPR withdrawal continues and is a bearish factor for oil prices.

(Sources:  DOE, CIM)

Perhaps less appreciated is that the SPR is down 117.2 mb from its all-time peak.  In the next few weeks, we will examine the geopolitics of the strategic reserve in an upcoming Weekly Geopolitical Report.

 Market news:

Geopolitical news:

  • Iran and the U.S. continue to discuss a return to the JCPOA, but our view is that both sides are still far apart.  Iran is worried that Washington’s position on the nuclear agreement can change radically with a new administration and is thus looking for changes to the agreement that would outlast a new government.  Essentially, Iran wants a new agreement; we don’t see the Biden administration giving them one.
  • Iranian President Raisi is facing pressure to comply with the Paris-based Financial Action Taskforce, which works against money laundering.  Iran is on the group’s blacklist (along with North Korea), and reformist elements in Iran want Raisi to pass legislation that would get the country off the blacklist.
  • Although Iranian supported groups are said to be behind that recent drone attack on Iraqi PM Mustafa al-Kadhimi, the head of the Quds Force of the Iranian Revolutionary Guard Corps visited the PM and offered Kadhimi his support.  We suspect this visit was designed to send a clear signal to various Iran-backed insurgent groups that such attacks were not supported.
  • Saudi Arabia and Iran have been holding talks but are postponing them until the new Iraqi government is formed.  This decision shows both Iran and the KSA the importance of controlling Iraq.
  • Iran claims the U.S. attempted to seize one of its oil tankers.  The U.S. has rejected the charge, and there isn’t clear evidence anything like this occurred.
  • The EU is engaging in actions that will likely improve the legitimacy of President Maduro of Venezuela.  The U.S. generally opposes such activities.

Alternative energy/policy news:

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