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Petroleum Market Commentary - June 23, 2014

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Iraq - Prices Higher - Inventory Higher - Speculation Higher

DIESEL:

During the week ending June 20th, the spot month diesel futures price increased by 6.36 cents per gallon (+2.13%) while the deferred months increased by 3 to 7 cents making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 7.74 cent discount to the spot price, from a discount of 7.06 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 higher 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 20th.

GASOLINE:

During the week ending June 20th, the spot month gasoline futures price increased by 7.00 cents per gallon (+2.29%) while the deferred months decreased by 5 to 7 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 26.21 cent discount to the spot price, from a discount of 25.43 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 20th.

ANALYSIS:

The US dollar was lower on the week which is positive 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 higher on the week which is positive for price. US domestic crude production increased again to a new 27-year high which is negative for price.

DEMAND:

Weekly US petroleum demand increased by 2.95% during the week ending June 13th. Demand is up 1.80% vs. one-year ago and demand is currently 0.74% below the five year average.

The attractiveness of making new hedges decreased on the week as prices and speculation 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.

Below is a chart of three-year domestic crude production as of June 13th.



Below is a chart of average vs. five-year demand as of June 13th.



Below is the one-year chart of spot diesel futures prices as of June 20th.



Below is the one-year chart of spot gasoline futures prices as of June 20th.

MARKET FACTORS:

: :  Inventories increasing by 0.64 million barrels while inventories were expected to decrease by 2.30 million barrels on the week. The five-year-average inventory increased by 1.52 million barrels. Inventories decreased vs. the five year average and increased vs. expectations.

: :  The conflict in Iraq that caused a sharp price spike on Thursday the 12th has not developed into a wider conflagration and has not interrupted the flow of oil from the region. While prices were up on the week, they are relatively stable given the situation. The bigger news here is that there is apparently uncontrolled warfare in Iraq and the threat of a wider sustained conflict with an unknown outcome and crude oil is only at $105 per barrel. This gives us an indication of the actual small risk of global shortage should the situation in Iraq devolve such that the flow of oil is significantly disrupted for a protracted period.

: :  US economic factors including:

: :  The US Stock market increasing by 1.38% on the week which is positive for economic and petroleum demand expectations and prices.

: :  The US Dollar decreasing by 0.25% 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.

INVENTORIES:

During the week ended June 13th, total petroleum inventories increased by 0.64 million barrels vs. a five year average increase of 1.52 million barrels and vs. an expected decrease of 2.30 million barrels. Inventories decreased by 0.88 million barrels vs. the five year average. Total inventories stand at 720.0 million barrels, up from 719.4 million barrels at the end of the previous week. The five year average inventory is 724.7 million barrels, up from 723.2 million barrels at the end of the previous week.

Current inventories are 0.65% lower than the five year average down from -0.53% at the end of the previous week. For the fifth 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 13th.



Below is the chart of current inventory vs. the five year average as of June 6th.

SPECULATION:

As of June 17th, the net speculative long position in petroleum futures was 445,377,000 barrels up 30,886,000 barrels (+7.45%) from the previous week. Speculation increased on the week and represents 61.85% of domestic inventories. Speculation is 23.94% above its one year moving average and is 0.73% below the 52-week high set on May 27th. The corresponding spot month diesel futures price on June 17th was 301.80 cents per gallon, up 13.39 cents from 288.41 cents per gallon during the previous week.

Diesel fuel price and size of speculative net long position in petroleum are 26.59% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 7.07% 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 287.44 cents per gallon or 14.36 cents per gallon less than current prices. The analysis would indicate that about 4.75% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up only slightly 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 359 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 17th.

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.