Weekly Energy Update (October 6, 2022)

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

Crude oil prices remain in a downtrend.

(Source: Barchart.com)

Crude oil inventories fell 1.4 mb compared to a 2.1 mb build forecast.  The SPR declined 6.2 mb, meaning the net draw was 7.6 mb.

In the details, U.S. crude oil production was steady at 12.0 mbpd.  Exports fell 0.1 mbpd, while imports fell 0.5 mbpd.  Refining activity rose 0.7% to 91.3% of capacity.  We are in the usual period for autumn refinery maintenance, so falling refining activity should be expected for the next few weeks.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  As the chart shows, we are at the seasonal trough in inventories.  The build seen in October into November is usually due to refinery maintenance.  With the SPR withdrawals continuing, the seasonal build could be exaggerated this year.

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 2003.  Using total stocks since 2015, fair value is $108.71.

Market News:

(Source:  EIA)

Geopolitical News:

 Alternative Energy/Policy News:

  • There is increasing interest in placing nuclear power plants on the sites of existing and closed coal utilities. Since the sites are already brownfields, there is less likely to be opposition and the coal plants are already connected to the grid.
  • High prices for lithium are spurring interest in other materials for batteries. The search for alternatives is a risk to lithium investment.  One battery design that might work for stationary requirements (like utilities) would be a flow battery.
  • The world’s largest CO2 removal plant will begin operations soon in Wyoming.
  • Energy storage other than batteries is another area of interest. Stored hydropower, where water is pumped to an elevated reservoir during periods of lower power demand to flow down through turbines during periods of high power demand, has been around for years.  China is working on a project that uses compressed air to accomplish the same outcome.
  • One of the great ironies of the clean energy industry is that it relies heavily on rare earths, which require large amounts of energy to mine and refine. So, as oil and gas prices have increased, production of these metals is starting to decline.

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