Weekly Energy Update (September 14, 2023)

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

Oil prices have continued their rise, with WTI trending towards $90 per barrel.

(Source: Barchart.com)

Commercial crude oil inventories rose 4.0 mb, compared to forecasts of a 2.0 mb draw.  The SPR rose 0.3 mb which puts the net build at 4.2 mb (the discrepancy is due to rounding).

In the details, U.S. crude oil production rose 0.1 mbpd to 12.9 mbpd.  Exports declined 1.8 mbpd, while imports rose 0.8 mbpd.  Refining activity rose 0.6% to 93.7% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Last week’s rise is mostly consistent with expected seasonal increases in crude oil stockpiles.  However, the sharp drop in exports is a bit of a puzzle and if reversed next week, inventories could remain tight.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $73.30.  Commercial inventory levels are a bearish factor for oil prices, but with the unprecedented withdrawal of SPR oil, we think that the total-stocks number is more relevant.

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 1985.  Using total stocks since 2015, fair value is $94.95.

Market News:

  • The executive director of the IEA issued an editorial in the Financial Times where he forecast peak oil and natural gas demand would occur by the end of the decade. The increase in EVs and renewables is expected to supplant fossil fuels.  Obviously, we won’t know for sure if he is correct for a few years, but this position does affect behavior.  Oil and gas firms have already shifted their focus from growth to providing return to shareholders and owners.  After all, how does one justify expanding production that may simply be stranded?  On the other hand, if he is wrong, and demand continues to grow, the behavior of firms increases the likelihood of much higher oil prices.
  • Russian refineries are planning seasonal maintenance that will allow for more oil exports but will also curtail product exports. It will be interesting to see if Russia maintains its promise to restrict oil supplies in light of this seasonal situation.
  • Although the Kingdom of Saudi Arabia’s (KSA) production restrictions have supported oil prices recently, it will almost certainly weaken the economy. That’s in part due to increasing Iranian exports and rising Guyana production that will reduce the KSA’s market share.  We don’t expect a change in Saudi production this year, but we wouldn’t be surprised to see an attempt to regain market share next year.
  • U.S. shale producers are trying to impress investors with their improved efficiency. In the past, it was all about production, but now there is a focus on profitability.  One measure of efficiency is the length of drilling laterals; in other words, getting more oil from each wellhead.
  • As the odds of an Australian LNG strike loom, Chevron (CVX, $165.59) is likely to deploy a legal strategy to avert a work stoppage. Workers have already went on strike to signal their resolve.  There is an element of Australian law that suggests that if two sides in a labor dispute are hopelessly deadlocked, one side can petition for arbitration and work continues.  It is apparently untested, and we would be surprised if the courts give Chevron an out.

Geopolitical News:

Alternative Energy/Policy News:

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