Weekly Energy Update (September 1, 2022)

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

(The Weekly Energy Update will not be published next week.  The report will return on September 15th)

Crude oil prices remain under pressure on fears of a deal with Iran and weakening economic growth.

(Source: Barchart.com)

Crude oil inventories fell 3.3 mb compared to a 2.5 mb draw forecast.  The SPR declined 3.1 mb, meaning the net draw was 6.4 mb.

In the details, U.S. crude oil production fell 0.2 mbpd to 12.0 mbpd.  Exports fell 0.8 mbpd, while imports were unchanged.  Refining activity rose 0.3% to 93.8% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  Clearly, this year is deviating from the normal path of commercial inventory levels although the past months’ inventory changes are more consistent with seasonal behavior.  We will approach the usual seasonal trough for inventories in mid-September.

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 $107.69.

With so many crosscurrents in the oil markets, we are beginning to see some degree of normalization.  The inventory/EUR model suggests oil prices should be around $64 per barrel, so we are seeing about $24 of risk premium in the market.

Market news:

(Source:  Bloomberg)

 Geopolitical news:

 Alternative energy/policy news:

       (Source:  Axios)

    • One factor driving the price of EVs higher is the goal of giving the cars the same range as a gasoline powered vehicle. However, when “fill up” of electricity can be done daily in one’s garage, an EV with a much smaller range might be more practical for everyday use and be cheaper to make.
    • We remain bullish on metals required in the conversion away from fossil fuels because it doesn’t appear that the demand is impossible to fill. At the same time, miners continue to find that local opposition is delaying the building of new mines for the materials required for batteries.

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