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Prices Lower - Dollar Higher - Speculation at 16-Month Low - Production Up
During the week ending August 22nd, the spot month diesel futures price decreased by 2.01 cents per gallon (-0.71%) while the deferred months decreased by 1 to 3 cents per gallon making the forward pricing curve lower and relatively unchanged in sloped. The one year forward price ended the week at a 0.66 cent premium to the spot price, from a premium of 0.71 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 steady 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 August 15th.
During the week ending August 22nd, the spot month gasoline futures price increased by 3.98 cents per gallon (+1.47%) while the deferred months changed by -2 to +2 cents per gallon making the forward pricing curve relatively steady and more negatively sloped. The one year forward price ended the week at a 9.05 cent discount to the spot price, from a discount of 2.60 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates steady 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 August 22nd.
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 higher which is positive for price. Speculation was lower on the week which is negative for price. US domestic crude production was higher which is negative for price. Domestic production is up 14.09% year over year.
Weekly US petroleum demand increased by 0.30% during the week ending August 15th. Domestic demand is up 2.41% vs. one-year ago and demand is currently 3.18% over the five year average.
The attractiveness of making new hedges increased on the week as prices were lower and speculation was 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.
Below is a chart of three-year domestic crude production as of August 15th.
Below is a chart of average vs. five-year demand as of August 15th.
Below is the one-year chart of spot diesel futures prices as of August 22nd.
Below is the one-year chart of spot gasoline futures prices as of August 22nd.
: : Inventories decreasing by 4.85 million barrels while inventories were expected to decrease by 3.30 million barrels on the week. The five-year-average inventory decreased by 0.35 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : Libyan production increased to 540,000 barrels per day from 415,000 bpd last week. More supply is negative for price and drives speculators away which is also negative for price.
: : Reduced concern that ISIS will take over oil producing regions of Iraq after US air strikes enabled the Kurds to retake territory that was taken earlier by ISIS. This downtick in geopolitical tensions is positive for the continued flow of oil from the region which is negative for price.
: : July Housing starts rose to an 8 month high level and July existing home sales to a 10 month high indicating health in the economically important housing sector which is positive for petroleum demand expectations and price.
: : August Philadelphia Federal Reserve Manufacturing activity rose to a 39 month high level indicating unexpected strength in manufacturing which is positive for economic growth prospects, petroleum demand expectations, and price.
: : Comments from Fed Chair Yellen on underutilization of labor may indicate that rates will stay low for longer than expected. This is negative for the dollar which is positive for petroleum prices while it negative for domestic economic growth prospects since the economy may be weaker than expected given Yellen's comments.
: : Stock market increasing by 1.81% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 1.11% 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 August 15th, total petroleum inventories decreased by 4.85 million barrels vs. a five year average decrease of 0.35 million barrels and vs. an expected decrease of 3.30 million barrels. Inventories decreased by 4.50 million barrels vs. the five year average. Total inventories stand at 697.4 million barrels, down from 702.2 million barrels at the end of the previous week. The five year average inventory is 717.7 million barrels, down from 718.0 million barrels at the end of the previous week.
Current inventories are 2.83% lower than the five year average down from -2.21% at the end of the previous week. Inventory levels continue to remain close to the five year average but are at one year low levels versus the historical level.
Below is the chart of current inventory as a percentage of the five year average as of August 15th.
Below is the chart of current inventory vs. the five year average as of August 15th.
As of August 19th, the net speculative long position in petroleum futures was 209,192,000 barrels down 29,435,000 barrels (-12.34%) from the previous week. Speculation decreased for the eighth consecutive week and represents 30.00% of domestic inventories. Speculation is 40.63% below its one year moving average. The corresponding spot month diesel futures price on August 19th was 281.71 cents per gallon, down 2.79 cents from 284.50 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 33.95% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 11.53% 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 281.97 cents per gallon or 0.26 cents per gallon more than current prices. The analysis would indicate that about -0.09% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about two cents lower on the week.
The net speculative long position has been variable over the past year ranging between 209 million and 453 million barrels with an average of about 352 million barrels, which is down about 4 million barrels on the week.
The graph below is three year history of speculative position levels as of August 19th.
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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