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Prices Mixed - Production Up- Rig Count Lower - Speculation Up - Stock Market Lower - Inventory Higher - Dollar Higher
During the week ending March 8th, the spot month diesel futures price decreased by 0.12 cents per gallon (-0.06%) while the deferred months decreased by 0 to 1 cents per gallon making the forward pricing curve virtually unchanged in level and slope. The one year forward price ended the week at a 2.62 cent premium to the spot price, from a premium of 2.52 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates steady demand expectations and steady inventories with respect to demand. Demand also includes speculation which was higher on the week. When the forward pricing curve decreases in slope (more negative or less positive), this usually indicates tighter inventories and is generally positive for price. When slope increases, this usually indicates more plentiful inventories and is negative for price.
During the week ending March 8th, the spot month gasoline futures price increased by 7.14 cents per gallon (+4.13%) while the deferred months increased by 2 to 6 cents per gallon making the forward pricing curve higher and negatively sloped. The one year forward price ended the week at a 1.97 cent discount to the spot price, from a premium of 3.20 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates higher current demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.
Weekly US petroleum demand decreased by 4.56% during the week ending March 1st. Domestic demand is up by 0.88% vs. one-year ago and demand is currently 4.85% above the five year average.
Domestic production was steady on the week at the all-time high of 12.1 million barrels per day set last week. Domestic production is 16.69% above year ago levels. The number of operating oil drilling rigs in the US decreased from 843 to 834 on the week. Currently, this is 518 more than the low of 316 rigs in 2016 and 48.17% lower than the peak of 1609 in October 2014. This high rig count is causing US production to generally grow and is a factor in buffering supply disruptions in other parts of the world. The recent decline in US rig count is due to relatively low prices and a pause in further investment in exploration and production. US domestic production has increased by 3,672,000 barrels per day (+43.57%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of March 8th.
Below is the one-year chart of spot gasoline futures prices as of March 8th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 0.45 million barrels while inventories were expected to decrease by 1.67 million barrels on the week. The five-year average inventory increased by 1.23 million barrels. Inventories increased vs. expectations and decreased vs. five year average.
: : Oil prices continue to be firm to higher due to increasing optimism regarding a China trade deal (which would increase petroleum demand expectations), and continued production cuts from OPEC + Friends (lower supply supportive of price).
: : An outage in Libya has been rectified which will increase Libyan production by 80,000 barrels per day immediately. This increase in supply is negative for price.
: : China lowered its projected domestic GDP growth rate this past week to the 6% to 6.5% level. This lowering of growth rate expectations is negative for petroleum demand expectations and price.
: : Saudi Arabia is expected to continue its production cuts into April in their continued effort to support price and not allow global inventories to grow. American shale production growth is expected to keep pace with Saudi/OPEC cuts in order to keeps the global market balanced. To what extent American production grows after OPEC + Friends cuts are complete remains to be seen. Continued growth in American production will serve to grow inventories and may be negative for price.
: : The Stock market decreased by -2.16% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.81% on the week which is negative for petroleum price. Commodities are used as a hedge against inflation and against a falling dollar. A stronger dollar reduces the relative demand for commodities for this purpose and prices decrease accordingly. Conversely, a weaker dollar increases relative demand for commodities and prices increase.
OPEC Production Five Year History – Down 560,000 barrels per day in February in response to lower prices and fears of oversupply. Most of this decrease came from Saudi Arabia (down 100,000 barrels per day) and Venezuela (down 160,000 barrels per day). Continued OPEC cuts are supportive of price. OPEC production to a four year low as they cede market share to US shale producers in order to support price.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of March 2019. The chart shows the expectation of varying levels of surplus through 2020 and a slight deficit for Q1 2019. This forecast shows a slightly lower surplus for 2019-2020 than the February forecast showed due in part to the continuing efforts of OPEC and other producers to limit supply. This is supportive of price.
Below is the one-year chart US stock market prices as of March 8th.
Below is the one-year chart for the US dollar index as of March 8th.
During the week ended March 1st, total petroleum inventories increased by 0.45 million barrels vs. a five year average increase of 1.23 million barrels and vs. an expected decrease of -1.67 million barrels. Inventories decreased by 0.79 million barrels vs. the five year average and increased by 2.11 million barrels vs. expectations. Total inventories stand at 839.6 million barrels, up from 839.2 million barrels at the end of the previous week. The five year average inventory is 822.8 million barrels, up from 821.6 million barrels at the end of the previous week.
Current inventories are +2.04% versus the five year average, down from +2.14% at the end of the previous week. Inventory with respect to the five year average has declined for the third week and is at its lowest level since October 26th. These lower inventories are the result of production cuts from OPEC and other producers in order to prop up price.
Government shutdown’s effect on speculation data has ended. Information is current.
As of March 5th, the net speculative long position in petroleum futures was 235,102,000 barrels, up 20,038,000 barrels (+9.32%) from the previous week. Speculation increased for the second week and represents 28.00% of domestic inventories. Speculation is 42.06% below its one year moving average. The corresponding spot month diesel futures price on March 5th was 201.64 cents per gallon, up 1.79 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 60.35% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 36.43% of diesel fuel price movements are explained by changes in level of speculation. One-year correlation has continued to increase in the past weeks.
The net speculative long position has been variable over the past year ranging between 134 million and 614 million barrels with an average of about 406 million barrels, which is down 7 million barrels on the week.
Based on a multiple regression analysis considering the level of the dollar, speculation, and inventory over the past five years as of March 5th, the market price for spot month diesel futures is estimated to be 148.71 versus the actual price of 201.64. This indicates that the market is currently overvalued by 52.93 cents per gallon given the assumptions of the pricing model.
Linwood Capital, LLC is an institutional fuel hedging management, advisory, and consulting firm. Linwood creates and manages customized fuel hedging programs for institutional consumers of petroleum and natural gas.
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