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Prices Lower - Inventory Lower - Speculation Higher
During the week ending April 4th, the spot month diesel futures price decreased by 3.99 cents per gallon (-1.35%) while the deferred months changed by +1 to -4 cents making the forward pricing curve mostly lower and less negatively sloped. The one year forward price ended the week at a 6.60 cent (2.27%) discount to the spot price, from a discount of 8.29 cents (2.80%) and the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates generally 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 April 4th.
During the week ending April 4th, the spot month gasoline futures price decreased by 0.54 cents per gallon (-0.18%) while the deferred months decreased by 0 to 3 cents per gallon making the forward pricing curve lower and more negatively sloped in the one-year forward time frame. The one year forward price ended the week at a 19.05 cent (6.95%) discount to the spot price, from a discount of 17.78 cents (6.44%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and lower inventory levels with respect to supply and demand.
Below is a one week chart of the gasoline forward pricing curve as of April 4th.
The US dollar was higher on the week which is negative for price. Inventories on the week were lower which is positive for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was higher on the week which is positive for price. US domestic crude production was higher on the week which is negative for price.
Below are charts of three year crude production and avg. vs. five year demand as of March 28th.
Weekly US petroleum demand decreased by 0.32% during the week ending March 28th. Demand is up 0.09% vs. one-year ago and demand is currently 0.57% below the five year average.
The attractiveness of making new hedges increased on the week as prices were lower but speculation was higher and remains high. Higher speculation causes hedging to be less attractive since it would involve more competition with speculators for long positions which is disadvantageous 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 April 4th.
: : Inventories decreasing by 3.40 million barrels while inventories were expected to decrease by 1.10 million barrels on the week. The five year average inventory increased by 1.75 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : Decreased tensions in Ukraine which decreased geopolitical risks of petroleum supply disruption which is negative for price.
: : Domestic petroleum demand dropping to a 9.5 month low level indicating that demand remains low in the US notwithstanding the increases in demand due to the cold winter.
: : Global economic factors including:
: : US domestic economic factors including:
: : The US Stock market increasing by 0.45% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.31% on the week which is positive 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.
During the week ended March 28th, total petroleum inventories decreased by 3.40 million barrels vs. a five year average increase of 1.75 million barrels and vs. an expected decrease of 1.10 million barrels. Inventories decreased by 5.14 million barrels vs. the five year average. Total inventories stand at 708.7 million barrels, down from 712.1 million barrels at the end of the previous week. The five year average inventory is 722.8 million barrels, up from 721.0 million barrels at the end of the previous week.
Current inventories are 1.95% smaller than the five year average down from -1.24% 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 28th.
As of April 1st, the net speculative long position in petroleum futures was 381,491,000 barrels up 8,235,000 barrels (+2.21%) from the previous week. Speculation increased for the first time in four weeks and represents 53.83% of domestic inventories. Speculation is 19.00% above its one year moving average and is 14.76% below the 52-week high set on March 4th. The corresponding spot month heating oil futures price on April 1st was 288.78 cents per gallon, down 3.37 cents from 292.15 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 70.03% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 49.04% 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 269.33 cents per gallon or 19.45 cents per gallon less than current prices. The analysis would indicate that about 6.73% of current price is attributable to speculation and its underlying market rationale. The "would be" price was unchanged 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 321 million barrels, which up about 2 million barrels on the week.
The graph below is three year history of speculative position levels as of April 1st.
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.
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