Weekly Energy Update (September 10, 2021)

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

Prices continued to consolidate in the high $60s.

(Source: Barchart.com)

Crude oil inventories fell 1.5 mb compared to the 6.0 mb draw forecast.  Analysts (including us) were clearly expecting Ida to bring a large draw.  However, the drop in exports and the slide in refinery operations prevented a significant decline.  The SPR was unchanged this week.

In the details, U.S. crude oil production fell 1.5 mbpd to 10.0 mbpd.  Exports fell 0.7 mbpd, while imports declined 0.5 mbpd.  Refining activity fell 9.4%, led by a 16.7% slide in the Gulf region.

(Sources: DOE, CIM)

This chart shows the seasonal pattern for crude oil inventories.  We are at the end of the summer withdrawal season.  Note that stocks are significantly below the usual seasonal trough.  A normal seasonal decline would result in inventories around 550 mb.  Our seasonal deficit is 69.7 mb.  We expect the disruptions from Hurricane Ida (see below for updates) will affect this data in the coming weeks.

Based on our oil inventory/price model, fair value is $66.42; using the euro/price model, fair value is $63.76.  The combined model, a broader analysis of the oil price, generates a fair value of $65.05.  Continued dollar strength is weighing on oil prices; the decline in inventory, on the other hand, is a bullish factor.


Hurricane Ida followed a path similar to Hurricane Katrina.  For the next few weeks, we will track the impact of Ida on the oil and gas market, using Katrina as a baseline comparison.  This week, we will look at refinery operations.

(Source:  DOE, CIM)

This chart compares refinery runs during the two periods.  Refineries require electricity to operate, and damage to the electrical grid will slow the recovery from the storm.  With Katrina, runs stabilized over the following few weeks, only to fall further by the month’s end.  We doubt we will see a similar plunge this year, as outside the Gulf region, most refinery activity was already depressed.

 Market news:

  • Natural gas prices have been on a tear this year.

(Source: Barchart.com)

Although these increases pale in comparison to the first decade of the century, they are in a range of highs seen in the shale era.  With the expansion of LNG, natural gas has become a more global commodityWe note supplies are tight in Europe, making the region vulnerable to a cold winter.  It will also support U.S. prices as producers struggle to meet global demand.

  • China tapped its SPR for the first time in response to higher oil prices.  The news did send prices lower initially.  Although Beijing could justify the release because of Hurricane Ida, the National Food and Strategic Reserves Administration indicated the release was due to rising raw materials prices.  In general, the U.S. rarely uses the SPR to control prices.  It is usually tapped as a result of a weather-related supply event or for budgetary reasons.  It is possible that China may operate its SPR as a buffer stock, buying when prices are low and selling when they are high.  If they act in this manner, it will take some pressure off of OPEC+ to maintain prices.
  • As the budget process begins, groups facing higher taxes, namely, the oil and gas industry, are pushing back.  Of particular interest is a fee on methane leakages.  Methane is a powerful greenhouse gas, and it often leaks into the atmosphere during oil and gas drilling.  There is proposed legislation for new fees on methane leaks.  The oil industry is pushing back against this proposal, as expected.  As fees on carbon become more common, the likelihood increases that oil, gas, and coal resources become stranded.

Geopolitical news:

 Alternative energy/policy news:

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