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Petroleum Market Commentary - November 11, 2013

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Prices Steady - Inventory Lower - Speculation Lower

DIESEL:

During the week ending November 8th, the spot month diesel futures price decreased by 1.03 cents per gallon (-0.36%) while the deferred months changed from down 1 cent to up 3 cents per gallon making the forward pricing curve unchanged in level and less negatively sloped. The one year forward price ended the week at a 1.75 cent (0.61%) discount to the spot price, from a discount of 3.49 cents (1.21%) and the end of the previous week.

The change in level and slope of this forward pricing curve indicates unchanged demand expectations and higher supplies with respect to demand. Demand includes speculative demand. 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.

GASOLINE:

During the week ending November 8th, the spot month gasoline futures price increased by 0.80 cents per gallon (+0.31%) while the deferred months were virtually unchanged. This made the forward pricing curve virtually unchanged in level and slope. The one year forward price ended the week at a 7.08 cent (2.85%) discount to the spot price, from a discount of 6.36 cents (2.56%) and the end of the previous week.

The change in level and shape of this forward pricing curve indicates unchanged demand expectations and unchanged inventory levels with respect to supply and demand.

ANALYSIS:

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 continues to be strong and remains near its 24-year high level set two weeks ago. This remains negative for price.


Weekly US petroleum demand increased by 0.43% during the week ending November 1st. Demand is up 3.01% vs. one year ago and demand is currently 0.97% above the five year average.

The attractiveness of making new hedges decreased slightly on the week as lower inventories supported prices. However, speculation decreased causing the long-side hedger to encounter less competition with speculators when entering new hedges. 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 one year chart of spot diesel futures prices as of November 8th.

Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of November 8th.

Factors affecting the market on the period were:

During the week ended November 1st, total petroleum inventories decreased by 7.08 million barrels vs. a five year average decrease of 1.57 million barrels and vs. an expected decrease of 0.60 million barrels. Inventories decreased by 5.51 million barrels vs. the five year average. Total inventories stand at 713.3 million barrels, down from 720.4 million barrels at the end of the previous week. The five year average inventory is 692.1 million barrels, down from 693.7 million barrels at the end of the previous week.

Current inventories are 3.06% larger than the five year average down from +3.85% at the end of the previous week. Inventories versus the five year average on a percentage basis remain positive. This helps to mitigate the effects of supply disruption and decreases price volatility.

As of November 5th, the net speculative long position in petroleum futures was 260,967,000 barrels down 17,670,000 barrels (-6.34%) from the previous week. The level of speculation is below the 4-month low level of 274 million barrels see on July 2nd. This level of speculation represents 36.59% of domestic inventories. Speculation is 10.42% below its one year moving average and is 39.16% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on November 5th was 286.41 cents per gallon, down 10.00 cents from 296.41cents per gallon during the previous week.

Diesel fuel price and size of speculative net long position in petroleum are 62.97% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 39.65% of the price movement of diesel fuel is explained by changes in levels of speculation. This statistical relationship has strengthened in recent weeks in an environment of relatively high speculation which tends to increase correlation. Other fundamental factors such as higher domestic production remain as important price drivers in the current environment. 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 272.92 cents per gallon or 13.49 cents per gallon less than current prices. The analysis would indicate that about 4.71% of current price is attributable to speculation and its underlying market rationale. The "would be" price was down by about 2 cents on the week.

The net speculative long position has been variable over the past year ranging between 181 million and 429 million barrels with an average of about 291 million barrels, which was roughly unchanged on the week.

The graph below is three year history of speculative position levels.

Linwood Capital, LLC is an institutional fuel hedging management and consulting firm. Linwood creates and manages customized fuel hedging programs primarily for public clients on a nationwide basis.