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Petroleum Market Commentary - July 14, 2014

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Prices Lower - Inventory Lower - Speculation Lower - New Production Record

DIESEL:

During the week ending July 11th, the spot month diesel futures price decreased by 6.75 cents per gallon (-2.31%) while the deferred months decreased by 0 to 2 cents per gallon making the forward pricing curve lower and positively sloped. The one year forward price ended the week at a 0.36 cent premium to the spot price, from a discount of 2.19 cents at the end of the previous week.

The change in level and slope of the diesel forward pricing curve indicates lower 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 July 11th.

GASOLINE:

During the week ending July 11th, the spot month gasoline futures price decreased by 11.13 cents per gallon (-3.69) while the deferred months decreased by 2 to 10 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 14.76 cent discount to the spot price, from a discount of 22.82 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 July 11th.

ANALYSIS:

The US dollar was lower on the week which is positive 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 increased to a new 27 year high which is negative for price.

DEMAND:

Weekly US petroleum demand decreased by 0.95% during the week ending July 4h. Demand is down 1.26% vs. one-year ago and demand is currently even with the five year average.

The attractiveness of making new hedges increased on the week as prices and speculation both decreased. 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 July 4th.



Below is a chart of average vs. five-year demand as of July 4th.



Below is the one-year chart of spot diesel futures prices as of July 11th.



Below is the one-year chart of spot gasoline futures prices as of July 11th.

MARKET FACTORS:

: :  Inventories decreasing by 1.56 million barrels while inventories were expected to decrease by 2.80 million barrels on the week. The five-year-average inventory decreased by 0.15 million barrels. Inventories decreased vs. the five year average and increased vs. expectations.

: :  Libya coming back on line after a deal was struck with rebels such that the port through which oil is exported could be re-opened. This immediately increases global supply and is negative for price.

: :  Lack of disruptions from Iraq has caused speculation to decrease which is negative for price.

: :  Reduced gasoline demand in the wake of Hurricane Arthur due to less holiday week driving. This decreased short-term demand, caused inventories to be larger and is negative for price.

: :  The US Stock market decreasing by 0.90% on the week which is negative for economic and petroleum demand expectations and prices.

: :  The US Dollar increasing by 0.10% 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 July 4th, total petroleum inventories decreased by 1.56 million barrels vs. a five year average decrease of 0.15 million barrels and vs. an expected decrease of 2.80 million barrels. Inventories decreased by 1.41 million barrels vs. the five year average. Total inventories stand at 718.7 million barrels, down from 720.2 million barrels at the end of the previous week. The five year average inventory is 720.6 million barrels, down from 720.7 million barrels at the end of the previous week.

Current inventories are 0.26 lower than the five year average down from -0.07% at the end of the previous week. For the eighth week, inventories versus the five year average on a percentage basis are only slightly 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 July 4th.



Below is the chart of current inventory vs. the five year average as of July 4th.

SPECULATION:

As of July 8th, the net speculative long position in petroleum futures was 392,190,000 barrels down 43,828,000 barrels (-10.05%) from the previous week. Speculation decreased on the week and represents 54.57% of domestic inventories. Speculation is 6.56% above its one year moving average. The corresponding spot month diesel futures price on July 8th was 287.36 cents per gallon, down 10.46 cents from 297.82 cents per gallon during the previous week.

Diesel fuel price and size of speculative net long position in petroleum are 17.19% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 2.95% 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 291.55 cents per gallon or 4.19 cents per gallon more than current prices. The analysis would indicate that about -1.45% 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 246 million and 453 million barrels with an average of about 368 million barrels, which up about 1 million barrels on the week.

The graph below is three year history of speculative position levels as of July 8th.

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.