Weekly Energy Update (November 2, 2023)

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

Crude oil prices are off their recent highs on expectations that the Hamas crisis will remain contained.

(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 0.1 mbpd, while imports increased 0.4 mbpd.  Refining activity fell 0.2% to 85.4% of capacity.  Refinery activity remains low but is in line with seasonal norms.

(Sources: DOE, CIM)

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

(Sources: DOE, CIM)

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $73.61.  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 $94.20.

Market News:

Geopolitical News:

  • We continue to closely monitor the situation in Gaza; so far, the conflict remains contained, although the recent Israeli incursion does show signs of expanding. However, we note that the U.S. has warned Iran against targeting American troops in the region.  There is also legislation being drafted to further punish Iran, and it appears to have bipartisan support.  If Iran faces a crackdown, it may lead to a drop in oil supplies.  Although we expect the war to be contained, history does show examples of such conflicts unexpectedly widening.  Thus, some degree of war premium should remain in oil prices.
  • Qatar has sentenced eight former Indian naval officers to death on allegations they were spying for Israel. Qatar is a major natural gas producer and is the largest LNG supplier to India.  The allegations appear to have caught India by surprise, and so if diplomatic efforts fail, it could affect the natural gas trade between the two nations.
  • Russia is trying to redirect its piped natural gas sales to China despite most of its infrastructure being directed toward Europe. There is one large pipeline to China—the Power of Siberia.  Russia has a second pipeline on the drawing board, but China has been reluctant to invest in the project for a number of reasons.  First, it has been improving relations with Central Asian nations that can also supply natural gas.  Second, because it also gets LNG, it may not need the Russian natural gas…unless the terms are very attractive.  And so, Beijing is driving a hard bargain with Moscow.
  • China announced new export controls on graphite, a key mineral in the energy transition. Although we haven’t heard of actual restrictions yet, the fear is that Beijing has created the bureaucratic infrastructure to restrict it in the future.
  • Washington has been in talks to further ease sanctions on Venezuela in return for open elections. However, recent actions by Venezuelan courts to thwart the opposition’s ability to choose its candidates is raising concerns that the Maduro government may not uphold its promises of free elections.  If the Maduro government fails, it is less likely that Caracas will get much sanctions relief.
  • In local Colombian elections, the leftist Petro administration suffered serious losses. If these elections portend a change in government in the national elections scheduled for 2026, it could bring a return of right-wing governments, which have traditionally supported Colombia’s fossil fuel industry.

Alternative Energy/Policy News:

Note: The DOE is making system upgrades and indicates it won’t publish data next week, meaning the next edition of this report will be published on November 16.

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