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Petroleum Market Commentary - June 9, 2014

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Prices Steady - Inventory Lower - Speculation Lower

DIESEL:

During the week ending June 6th, the spot month diesel futures price decreased by 1.70 cents per gallon (-0.59%) while the deferred months increased by 1 to 2 cents making the forward pricing curve steady and less negatively sloped. The one year forward price ended the week at a 3.12 cent discount to the spot price, from a discount of 3.17 cents at the end of the previous week.

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

Below is a one week chart of the diesel forward pricing curve as of June 6th.

GASOLINE:

During the week ending June 6th, the spot month gasoline futures price decreased by 3.29 cents per gallon (-1.11%) while the deferred months decreased by 0 to 3 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 21.35 cent discount to the spot price, from a discount of 23.57 cents 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 June 6th.

DEMAND:

Weekly US petroleum demand decreased by 0.32% during the week ending May 30th. Demand is up 3.95% vs. one-year ago and demand is currently 3.06% above the five year average.

The attractiveness of making new hedges increased on the week as prices were lower and speculation levels were lower. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive.

ANALYSIS:

The US dollar was steady on the week which is neutral 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 lower on the week which is negative for price. US domestic crude production was lower which is positive for price.

Below is a chart of three-year domestic crude production as of May 30th.



Below is a chart of average vs. five-year demand as of May 30th.

Weekly US petroleum demand decreased by 0.32% during the week ending May 30th. Demand is up 3.95% vs. one-year ago and demand is currently 3.06% above the five year average.

The attractiveness of making new hedges increased on the week as prices and speculation were lower. While speculation was lower, relatively high levels of speculation make new hedging unattractive since new hedging should seek to involve a minimum amount of competition with speculators for long futures positions. 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 is the one-year chart of spot diesel futures prices as of June 6th.



Below is the one-year chart of spot gasoline futures prices as of June 6th.

MARKET FACTORS:

: :  Inventories decreasing by 1.21 million barrels while inventories were expected to decrease by 1.00 million barrels on the week. The five-year average inventory decreased by 1.32 million barrels. Inventories increased vs. the five year average and decreased vs. expectations.

: :  Ukraine remains a factor in the market but fades as the situation sorts itself out which diminishes the risk that the situation will cause a disruption in crude oil supply.

: :  OPEC production increased by 75,000 barrels per day in May which increases supply and is negative for price.

: :  US economic factors including:

: :  Global economic factors including:

: :  The US Stock market increasing by 1.46% on the week which is positive for economic and petroleum demand expectations and prices.

: :  The US Dollar increasing by 0.02% 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 May 30th, total petroleum inventories decreased by 1.21 million barrels vs. a five year average decrease of 1.32 million barrels and vs. an expected decrease of 1.00 million barrels. Inventories increased by 0.11 million barrels vs. the five year average. Total inventories stand at 719.4 million barrels, down from 720.6 million barrels at the end of the previous week. The five year average inventory is 722.8 million barrels, down from 724.1 million barrels at the end of the previous week.

Current inventories are 0.47% larger than the five year average up from -0.49% at the end of the previous week. For the third week, inventories versus the five year average on a percentage basis are negative showing that inventories continue to be steady vs. historical averages. 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. In this case, "risk adjusted" inventory is higher.

Below is the chart of current inventory as a percentage of the five year average as of May 30th.



Below is the chart of current inventory vs. the five year average as of May 30th.

SPECULATION:

As of June 3rd, the net speculative long position in petroleum futures was 422,573,000 barrels down 13,283,000 barrels (-3.05%) from the previous week. Speculation decreased on the week and represents 58.74% of domestic inventories. Speculation is 19.64% above its one year moving average and is 5.82% below the 52-week high set last week. The corresponding spot month diesel futures price on June 3rd was 286.58 cents per gallon, down 7.41 cents from 293.99 cents per gallon during the previous week.

Diesel fuel price and size of speculative net long position in petroleum are 34.05% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 11.59% 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 284.28 cents per gallon or 2.30 cents per gallon less than current prices. The analysis would indicate that about 0.80% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up by about 3 cents on the week.

The net speculative long position has been variable over the past year ranging between 240 million and 449 million barrels with an average of about 353 million barrels, which up about 4 million barrels on the week.

The graph below is three year history of speculative position levels as of June 3rd.

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.