Weekly Energy Update (November 17, 2022)

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

(The Weekly Energy Update will not be published next week due to Thanksgiving.  The report will return on December 1.)

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

(Source: Barchart.com)

Crude oil inventories fell 5.4 mb compared to a 1.9 mb draw forecast.  The SPR declined 4.1 mb, meaning the net draw was 9.5 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.  This week’s large draw is takes inventories back to the seasonal average.

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 $106.63.


Market News:

 Geopolitical News:

 Alternative Energy/Policy News:

  • For the most part, we view COP-27 as environmental theater since without an enforcement mechanism, environmental promises are just that. However, we do note that there has been some movement to reduce coal usage in power production.
  • California voters did not support a measure to fund EV charging stations by raising taxes on high-income citizens. Without this funding, it isn’t clear how the state will prepare to shift from gasoline to electric vehicles.
  • Meanwhile, China’s share of the global EV market continues to grow.
    • BMW (BMWYY, $29.46) is building a $1.4 billion operation to expand battery production in China.
  • As biofuel research expands, there is a growing concern that without regulatory guidance, the potential for the fuel source will be hampered by inconsistent standards.
  • Separating hydrogen from water creates a clean (“green”) product. Unfortunately, it is also energy intensive and expensive.  Four U.S. nuclear power reactors are part of a study to see if nuclear power can be used to generate green hydrogen.  Meanwhile, a raft of startups are trying to develop other ways to bring down the cost of green hydrogen.
  • The U.S. has blocked 1,000 shipments of solar energy components from China on grounds that the products were made by slave labor. There have been rising tensions between the solar installation industry and the non-Chinese solar component industry.  The former wants the cheapest product it can find, while the latter wants to compete with China, the world’s low-cost producer.  As U.S./Chinese relations deteriorate, the non-Chinese production industry is seeing an opportunity.
  • Leaded fuel was used to counter engine knock, though, unfortunately, lead is highly toxic so it was phased out of gasoline in the U.S. over three decades ago. However, small aircraft were excluded from the move to unleaded fuels but are finally making the switch.
  • One of the problems of solar and wind energy is that it’s unreliable, so as it expands, utilities must still keep conventional capacity available for periods when the power generated from wind or solar is lacking. The expansion of wind and solar in the western U.S. is leading to reliability issues.
  • We are still in the early stages of battery technology. The current industry standard for EVs, the lithium-ion battery, has some flaws as it’s prone to fires, it’s expensive to produce, and it doesn’t have a long life.  But, in its favor, it does recharge quickly and is lightweight.  The next new thing may be the sodium-ion battery.  It’s a bit heavier than the lithium-ion battery, and not as energy dense. New technology, though, is showing rapid improvement.  If it flies, it would dramatically reduce the cost of EVs and have much faster recharging capabilities.  Better and cheaper batteries are likely the key to widespread EV adoption.
    • Asian battery producers have been reluctant to invest in Australian mining that would provide raw materials for batteries, putting the makers at risk of supply shortages.
    • EV makers are looking to vertically integrate their operations with miners of key battery materials and with battery manufactures to create secure supply chains.
    • China uses lithium-iron-phosphate batteries which are cheaper but have less range than batteries that use nickel.

  View PDF