Weekly Energy Update (October 7, 2021)

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

Prices are approaching $80 per barrel.

(Source: Barchart.com)

Crude oil inventories rose 2.3 mb compared to the 1.0 build forecast.  The SPR declined 0.9 mb, meaning the net draw was 1.4 mb.

In the details, U.S. crude oil production rose 0.2 mbpd to 11.3 mbpd, approaching the 11.5 mbpd pre-Ida level.  Exports fell 0.4 mbpd, while imports declined 0.9 mbpd.  Refining activity rose 0.3%.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  We are in the autumn consolidation and build season.  Note that stocks are significantly below the usual seasonal trough.  Our seasonal deficit is 72.3 mb.

Based on our oil inventory/price model, fair value is $67.48; using the euro/price model, fair value is $58.26.  The combined model, a broader analysis of the oil price, generates a fair value of $62.66.  We are seeing a notable divergence in the model between inventory and the dollar and a rising level of overvaluation.  Some of the overvaluation is likely due to fears of tighter inventories. If builds continue (and the seasonal pattern indicates a modest build that will start later in October), we will probably see some moderation of prices.


Thankfully, Hurricane Ida was not followed up by a subsequent storm as with Katrina in 2005.  Since the comparison is becoming less relevant, this will be the last week of reporting on this issue.

(Source:  DOE, CIM)

This chart compares refinery runs during the two periods following the hurricanes.  In 2005, Hurricane Rita soon followed Katrina.  Since that didn’t occur with Ida (at least so far), we have seen refinery activity return to normal this week.

 Market news:

Geopolitical news:

 Alternative energy/policy news:

  • As the U.K. energy crisis unfolds, PM Johnson is being pressed on his plans for decarbonization.  Part of Britain’s plans to address decarbonization is through subsidies and surcharges designed to encourage conservation and cleaner energy consumption.   Although politically unpopular, it will be practically impossible to decarbonize without raising prices on oil, gas, and coal.
  • Among the alternative energy sources, tapping tides has not received significant attention, but in coastal regions, it could be an important source of clean energy.  Tides are powerful and regular, and tapping them could be beneficial.
  • We have been reporting on new technologies in nuclear power.  We note a recent article in Mother Jones discussing nuclear pellet technology.  Although the reporting isn’t breaking new ground, the fact it is in left-wing media suggests a growing recognition that nuclear power will be part of decarbonization.
  • Exxon (XOM, USD, 60.10) is continuing efforts to create biofuels from algae.
  • Although reducing carbon emissions is important, the reality is that even if we were net carbon zero today, climate warming would likely continue for decades.  This fact has led to continued attempts to pull carbon from the atmosphere.  It is also likely, at some point, that geoengineering will be deployed to cool the planet.

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