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Iraq - Prices Higher - Inventory Lower - Speculation Lower
During the week ending June 13th, the spot month diesel futures price increased by 11.64 cents per gallon (+4.05%) while the deferred months increased by 4 to 11 cents making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 7.06 cent discount to the spot price, from a discount of 3.12 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates higher demand expectations and lower supplies with respect to demand. Demand includes speculative demand which was lower on the week (measured on Tuesdays). 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 13th.
During the week ending June 13th, the spot month gasoline futures price increased by 11.87 cents per gallon (+4.04%) while the deferred months decreased by 5 to 11 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 24.53 cent discount to the spot price, from a discount of 21.35 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher 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 June 13th.
Weekly US petroleum demand decreased by 3.02% during the week ending June 6th. Demand is up 1.62% vs. one-year ago and demand is currently 1.05% below the five year average.
The attractiveness of making new hedges decreased on the week as prices were higher due to the unrest and situation in Iraq. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive.
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 lower which is negative for price. Speculation was lower on the week which is negative for price. US domestic crude production was higher which is negative for price.
Below is a chart of three-year domestic crude production as of June 6th.
Below is a chart of average vs. five-year demand as of June 6th.
Below is the one-year chart of spot diesel futures prices as of June 13th.
Below is the one-year chart of spot gasoline futures prices as of June 13th.
: : Inventories decreasing by 0.04 million barrels while inventories were expected to decrease by 0.95 million barrels on the week. The five-year average inventory increased by 0.37 million barrels. Inventories decreased vs. the five year average and increased vs. expectations.
: : Conflict in Iraq caused a sharp price spike on Thursday the 12th as militant forces swept through northern Iraq taking control of several cities in the process with an eye toward taking control of Baghdad. This activity, of course, increases the risk of crude oil supply disruption that has not yet occurred. It also affects the longer-term outlook for petroleum supply growth in the Middle East region. If and as the situation improves or stabilizes, price will correct. The main factor is actual disruption of oil supply or, if the militants were to take control of the southern part of Iraq where the oil fields are located, the increase of risk of supply disruption. The situation is very fluid.
: : 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 decreasing by 0.71% on the week which is negative for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.27% 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.
During the week ended June 6th, total petroleum inventories decreased by 0.04 million barrels vs. a five year average increase of 0.37 million barrels and vs. an expected decrease of 0.95 million barrels. Inventories decreased by 0.41 million barrels vs. the five year average. Total inventories stand at 719.4 million barrels, down from 719.4 million barrels at the end of the previous week. The five year average inventory is 723.2 million barrels, up from 722.8 million barrels at the end of the previous week.
Current inventories are 0.53% lower than the five year average down from -0.47% at the end of the previous week. For the fourth 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 June 6th.
Below is the chart of current inventory vs. the five year average as of June 6th.
As of June 10th, the net speculative long position in petroleum futures was 414,491,000 barrels down 8,082,000 barrels (-1.91%) from the previous week. Speculation decreased on the week and represents 57.62% of domestic inventories. Speculation is 16.28% above its one year moving average and is 7.61% below the 52-week high set on May 27th. The corresponding spot month diesel futures price on June 10th was 288.41 cents per gallon, up 1.83 cents from 286.58 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 26.58% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 7.06% 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 287.32 cents per gallon or 1.09 cents per gallon less than current prices. The analysis would indicate that about 0.38% 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 356 million barrels, which up about 3 million barrels on the week.
The graph below is three year history of speculative position levels as of June 10th.
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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