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Prices Lower - Dollar Higher - Inventories Higher
During the week ending September 12th, the spot month diesel futures price decreased by 7.87 cents per gallon (-2.79%) while the deferred months changed between down 7 and up 1 cent per gallon making the forward pricing curve lower and positively sloped over the next 12 months. The one year forward price ended the week at a 2.68 cent premium to the spot price, from a discount of 0.60 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 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 September 12th.
During the week ending September 12th, the spot month gasoline futures price decreased by 6.46 cents per gallon (-2.50%) while the deferred months decreased by 1 to 6 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 6.50 cent discount to the spot price, from a discount of 9.60 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 September 12th.
The US dollar was higher on the week which is negative for price. Inventories on the week were higher which is negative for price. The stock market, as a proxy for demand expectations, was lower which is negative for price. Speculation was higher on the week which is positive for price. US domestic crude production was down which is positive for price. Domestic production is up 10.91% year over year.
Weekly US petroleum demand decreased by 6.81% during the week ending September 5th. Domestic demand is up 2.05% vs. one-year ago and demand is currently 2.14% over the five year average.
The attractiveness of making new hedges increased on the week as prices were lower and speculation was only marginally higher. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging may become more attractive.
Below is a chart of three-year domestic crude production as of September 5th.
Below is a chart of average vs. five-year demand as of September 5th.
Below is the one-year chart of spot diesel futures prices as of September 12th.
Below is the one-year chart of spot gasoline futures prices as of September 12th.
: : Inventories increasing by 5.50 million barrels while inventories were expected to decrease by 0.60 million barrels on the week. The five-year-average inventory decreased by 0.44 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : Chinese demand concerns as petroleum imports there fell by the most in five months. This may signal lower demand growth expectations from China which is negative for price.
: : Libyan production increasing to 850,000 barrels per day from 400,000 barrels per day in July. This is a significant increase to supply which is negative for price.
: : OPEC lowered its 2014 demand forecast by 200,000 barrels per day to 29.5 million barrels per day. Lower demand is negative for price.
: : The IEA (International Energy Agency) lowered its global 2014 demand forecast by 150,000 barrels per day to 92.6 million barrels per day and lowered its 2015 forecast by 165,000 barrels per day to 93.8 million barrels per day. Lower forecasted demand is negative for price.
: : Forecasted 2014 German GDP growth was revised lower from 2.0% to 1.4% and the 2015 forecast revised lower from +2.5% to +1.9+. Slower economic growth means slower petroleum demand growth which is negative for price.
: : Economic sanctions against Russia seem to be slowing the Russian economy and the economies of their neighbors in Europe. This is negative for petroleum demand expectations and price.
: : Stock market decreasing by 1.10% on the week which is negative for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.60% 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 September 5th, total petroleum inventories increased by 5.50 million barrels vs. a five year average decrease of 0.44 million barrels and vs. an expected decrease of 0.60 million barrels. Inventories increased by 5.94 million barrels vs. the five year average. Total inventories stand at 698.5 million barrels, up from 693.0 million barrels at the end of the previous week. The five year average inventory is 715.1 million barrels, down from 715.5 million barrels at the end of the previous week.
Current inventories are 2.32% lower than the five year average, up from -3.15% 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 September 5th.
Below is the chart of current inventory vs. the five year average as of September 5th.
As of September 9th, the net speculative long position in petroleum futures was 183,591,000 barrels up 11,113,000 barrels (+6.44%) from the previous week. Speculation increased for the first time in 11 weeks and represents 26.29% of domestic inventories. Speculation is 45.96% below its one year moving average. The corresponding spot month diesel futures price on September 9th was 279.15 cents per gallon, down 0.52 cents from 279.67 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 43.84% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 19.22% 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 279.03 cents per gallon or 0.12 cents per gallon less than current prices. The analysis would indicate that about 0.04% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about a half cent lower on the week.
The net speculative long position has been variable over the past year ranging between 172 million and 453 million barrels with an average of about 340 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 September 9th.
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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