Weekly Energy Update (September 28, 2023)

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

Oil prices are breaking out, raising the potential for a move toward $95 per barrel.

(Source: Barchart.com)

Commercial crude oil inventories fell 2.2 mb compared to forecasts of a 2.0 mb build.  The SPR fell 0.3 mb, which puts the net draw at 2.4 mb (difference due to rounding).

In the details, U.S. crude oil production was steady at 12.9 mbpd.  Exports fell 1.1 mbpd, while imports rose 0.7 mbpd.  Refining activity fell 1.6% to 89.5% of capacity. We are clearly heading into the autumn refinery maintenance period which should reduce demand.

(Sources:  DOE, CIM)

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Last week’s decline is contra seasonal and thus is bullish for crude oil prices.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $74.92.  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 1984.  Using total stocks since 2015, fair value is $95.49.

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