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Petroleum Market Commentary - April 15, 2013

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Prices Lower - Inventory Higher - Speculation Lower - Demand Lower - Production Higher

DIESEL:

During the week ending April 12th, the spot month heating oil futures price decreased by 3.80 cents per gallon (-1.31%) while the deferred months decreased by 0 to 3 cents per gallon making the forward pricing curve lower and less negatively sloped in general while becoming nearly flat over the next twelve months. The one year forward price ended the week at a 0.76 cent (0.26%) premium to the spot price, from a discount of 1.73 cents (0.59%) and the end of the previous week.

The change in level and slope of this forward pricing curve indicates lower demand expectations and higher supplies with respect to demand. Demand includes speculative demand which increased on the week and can be volatile. 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.

GASOLINE:

During the week ending April 12th, the spot month gasoline futures price decreased by 6.18 cents per gallon (-2.16%) while the deferred months decreased by 0 to 4 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 7.87 cent (2.89%) discount to the spot price, from a discount of 12.87 cents (4.71%) 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.

ANALYSIS:

A much weaker than expected US payroll report indicating new jobs created caused economic and petroleum demand expectations to decrease. The US dollar touched an 8 month high which is negative for price but was lower on the week. Inventories on the week were lower than expectations and remain above historical averages. The stock market was lower which is negative for price. Speculation was higher on the week which is supportive of price. US domestic crude production was unchanged on the week. Geopolitical risk with Iran and North Korea continues to be a background factor that is supportive of price.

Weekly US petroleum demand decreased by 4.46% during the week ending April 5th. Demand is up 0.90% vs. one year ago and is 4.80% below the five year average.

The attractiveness of making new hedges increased again on the week given the lower price environment. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive. Entering new, longer-term hedges at these levels would involve less competition with speculators for long futures positions. Heating oil futures in the $2.80 - $2.90 has made hedging more advantageous depending on the goals of hedger.

Below is a one year chart of spot diesel futures prices, the proxy hedging mechanism for diesel fuel, as of April 12th.

Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of April 12th.

Factors affecting the market on the period were:

During the week ended April 5th, total petroleum inventories increased by 1.78 million barrels vs. a five year average decrease of 4.48 million barrels and vs. an expected decrease of 2.20 million barrels. Inventories increased by 6.26 million barrels vs. the five year average. Total inventories stand at 724.1 million barrels, up from 722.3 million barrels at the end of the previous week. The five year average inventory is 704.6 million barrels, down from 709.0 million barrels at the end of the previous week.

Current inventories are 2.77% larger than the five year average up from +1.87% at the end of the previous week. Inventories versus the five year average on a percentage basis remain positive. This helps to mitigate the effects of supply disruption and decreases price volatility.

As of April 9th, the net speculative long position in petroleum futures was 263,195,000 barrels down 21,823,000 barrels (-7.66%) from the previous week. The level of speculation decreased for the first time in four weeks and represents 36.35% of domestic inventories. Speculation is 3.80% above its one year moving average and is 26.86% below the 52 week high level. Speculative levels continue to be around the one-year average. The corresponding spot month heating oil futures price on April 9th was 296.13 cents per gallon, down12.61 cents from 308.74 cents per gallon during the previous week.

Heating oil price and size of speculative net long position in petroleum are 79.62% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 63.39% of the price movement of heating oil is explained by changes in levels of speculation. This statistical relationship has become weaker over the past several months but remains significant. This change shows a difference in the market over the past several months where, perhaps, the market is more of a function of market fundamentals of supply and demand and slightly less a function of speculation. As the level of speculation decreases, the correlation tends to decrease as well as we have seen in the past. 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 heating oil futures price would be 235.83 cents per gallon or 60.29 cents per gallon less than current prices. The analysis would indicate that about 20.36% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about a penny lower on the week.

The net speculative long position has been variable over the past year ranging between 70 million and 410 million barrels with an average of about 254 million barrels, down by roughly one million barrels on the week.

The graph below is three year history of speculative position levels.

Linwood Capital, LLC is an institutional fuel hedging management and consulting firm. Linwood creates and manages customized fuel hedging programs primarily for public clients on a nationwide basis.