Weekly Energy Update (September 8, 2023)

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

Oil prices have clearly broken out of their trading range, with Brent crude oil moving above $90 per barrel.  Prices are being supported by the Russian and Saudi extension of production restraint.

(Source: Barchart.com)

Commercial crude oil inventories fell 6.3 mb, much lower than the 1.8 mb draw forecast.  The SPR rose 0.8 mb which puts the net draw at 5.5 mb.

In the details, U.S. crude oil production was steady at 12.8 mbpd.  Exports rose 0.4 mbpd, while imports rose 0.2 mbpd.  Refining activity fell 0.2% to 93.1% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Last week, the continued decline in inventories put stocks well below seasonal norms.  We are nearing the seasonal trough, and if stockpiles continue to decline, it would be a bullish factor for oil prices.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $74.53.  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 $95.32.

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