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Petroleum Market Commentary - March 24, 2014

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Prices Lower - China Slowing - Speculation Lower - Production Higher

DIESEL:

During the week ending March 21st, the spot month diesel futures price decreased by 2.30cents per gallon (-0.78%) while the deferred months decreased by 0 to 2 cents making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 6.99 cent (2.39%) discount to the spot price, from a discount of 8.14 cents (2.77%) and the end of the previous week.

The change in level and slope of the diesel forward pricing curve indicates lower demand expectations and higher supplies with respect to demand. Demand includes speculative demand. 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.

Below is a one week chart of the diesel forward pricing curve as of March 21st.

GASOLINE:

During the week ending March 21st, the spot month gasoline futures price decreased by 5.18 cents per gallon (-1.75%) while the deferred months decreased by 3 to 5 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 19.61 cent (7.23%) discount to the spot price, from a discount of 22.02 cents (8.04%) and the end of the previous week.

The change in level and shape of this forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand.

Below is a one week chart of the gasoline forward pricing curve as of March 14th.

ANALYSIS:

The US dollar was higher on the week which is negative for price. Inventories on the week were higher which is negative for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was lower on the week which is negative for price. US domestic crude production was higher on the week at a new 25+ year high which is negative for price.

Below are charts of three year crude production and avg. vs. five year demand as of March 14th.


Weekly US petroleum demand decreased by 1.28% during the week ending March 14th.Demand is up 1.43% vs. one-year ago and demand is currently 0.88% above the five year average.

The attractiveness of making new hedges increased on the week as prices were lower and speculation was lower as well. Lower speculation causes hedging to be more attractive since it would involve less competition with speculators for long positions which is advantageous for the long-hedger. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive.

Below are the one year charts of spot diesel and spot gasoline futures prices as of March 21th.


MARKET FACTORS:

: :  Inventories increasing by 1.29 million barrels while inventories were expected to increase by 0.10 million barrels on the week. The five year average inventory decreased by 0.92 million barrels. Inventories increased vs. the five year average and vs. expectations.

: :  Expectations that the situation in Ukraine will not disrupt the flow of oil led speculators to shed speculative long positions which is negative for price.

: :  March Philadelphia Federal Reserve Manufacturing Index rose more than expected showing signs of domestic economic growth which is positive for petroleum demand growth expectations and price.

: :  Reports that China is loosening its funding restrictions for property investment which is positive for Chinese economic growth expectations, petroleum demand expectations in China and petroleum prices.

: :  The US Stock market increasing by 1.31% on the week which is positive for economic and petroleum demand expectations and prices.

: :  The US Dollar increasing by 0.87% 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.

INVENTORIES:

During the week ended March 14th, total petroleum inventories increased by 1.29 million barrels vs. a five year average decrease of 0.92 million barrels and vs. an expected increase of 0.10 million barrels. Inventories increased by 2.20 million barrels vs. the five year average. Total inventories stand at 709.0 million barrels, up from 707.7 million barrels at the end of the previous week. The five year average inventory is 719.3 million barrels, down from 720.3 million barrels at the end of the previous week.

Current inventories are 1.44% smaller than the five year average up from -1.74% at the end of the previous week. Inventories versus the five year average on a percentage basis continue to be negative. The five year average inventory has grown over the past five years and it has become increasingly difficult for current inventories to surpass the five year average. Current inventories will be closer to the five year average and not as high compared to it. Also, increased production in the U.S. over the past three years diminishes the need for larger inventories since production is geographically closer to consumption and the risk of disruption and disruption due to geopolitical events is lower.

Below is a one year chart of average petroleum inventory as of March 14th.

SPECULATION:

As of March 18th, the net speculative long position in petroleum futures was 382,772,000 barrels down 36,526,000 barrels (-8.71%) from the previous week. Speculation decreased for the second week in a row and represents 53.99% of domestic inventories. Speculation is 20.80% above its one year moving average and is 14.47% below the 52-week high set on March 4th. The corresponding spot month heating oil futures price on March 18th was 291.55 cents per gallon, down 4.55 cents from 296.10 cents per gallon during the previous week.

Diesel fuel price and size of speculative net long position in petroleum are 72.96% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 53.23% of the price movement of diesel fuel is explained by changes in levels of speculation. A linear regression analysis over the past 52 weeks shows that if speculation were zero and the market forces causing speculation evaporated, that the spot month diesel futures price would be 268.18 cents per gallon or 23.37 cents per gallon less than current prices. The analysis would indicate that about 8.01% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up by about 1.50 cents on the week.

The net speculative long position has been variable over the past year ranging between 203 million and 448 million barrels with an average of about 317 million barrels, which up about 3 million barrels on the week.

The graph below is three year history of speculative position levels as of March 18th.

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, natural gas, and electricity on a nationwide basis.