Weekly Energy Update (November 16, 2023)

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

Crude oil prices have retreated from their early October highs.

 (Source: Barchart.com)

Commercial crude oil inventories rose 0.8 mb compared to forecasts of a 2.0 mb build.  The SPR was unchanged, which puts the net build at 0.8 mb.

In the details, U.S. crude oil production was steady at 13.2 mbpd.  Exports rose 0.4 mbpd, while imports were unchanged.  Refining activity rose 0.9% to 86.1% of capacity.  Refinery activity has started its seasonal recovery which should last into December.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  We continue to see lower-than-normal inventory accumulation although the gap to average is narrowing.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $67.53.  However, given the level of geopolitical risk in the market, we are not surprised that oil prices are well above this model’s fair value.

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 late 1984.  Using total stocks since 2015, fair value is $91.44.

Market News:

  • The IEA released its November oil market report, covering the month of October. Rising U.S. and Brazilian oil production lifted global production to 102.0 mbpd.  Demand is also expected to be 102.0 mbpd, meaning that inventory accumulation will remain modest.  Demand next year is expected to rise to a modest 0.9 mbpd.  The IEA estimates that OPEC+ has 5.1 mbpd of spare capacity of which the Kingdom of Saudi Arabia (KSA) has 3.2 mbpd.
  • As world leaders prepare for COP28, we see a divergence between promises and behaviors. Despite promises of reduced carbon emissions, nations around the world continue to expand fossil fuel production.  This is a classic example of the “free rider” problem, which states that an individual benefits from good but costly behavior, but benefits more from other’s good but costly behavior.  And so, no one does anything, but expects others to “do good.”  Without an enforcement mechanism, carbon reduction is just talk.
  • This year is shaping up to be one of the warmest on record, with October shattering records. The overall upward trend in temperatures is being bolstered by the sunspot cycle, El Niño, and an undersea volcanic eruption earlier this year.  If this warmth continues, it will be bearish news for natural gas, propane, and heating oil.
  • Environmentalists are targeting the U.S. LNG industry on the grounds of excessive methane emissions. Methane often leaks from natural gas wells and is a potent greenhouse gas.  However, if these activists are successful, it puts European energy security at risk.

Geopolitical News:

Alternative Energy/Policy News:

Rapidly rising costs for wind turbines are leading to cancelled projects or attempts to renegotiate prices.  If governments don’t get involved, wind projects may stall.  Parts companies for windmills indicate that wind goals set for 2030 will not be met.

Note: Due to the Thanksgiving Day holiday, the next report will be issued November 30.

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