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Prices Lower - Inventories Lower - Speculation Higher - Production Higher
During the week ending January 3rd, the spot month diesel futures price decreased by 15.27 cents per gallon (-4.94%) while the deferred months were down by 10 to 15 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at an 8.38 cent (2.85%) discount to the spot price, from a discount of 13.50 cents (4.32%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates lower 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.
During the week ending January 3rd, the spot month gasoline futures price decreased by 11.45 cents per gallon (-4.08%) while the deferred months decreased by 8 to 11 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 16.23 cent (6.41%) discount to the spot price, from a discount of 20.48 cents (7.84%) 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.
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 lower which is negative for price. Speculation was higher on the week which is positive for price. US domestic crude production increased to yet another 25 year high which is generally negative for price.
Weekly US petroleum demand decreased by 7.23% during the week ending December 27th. Demand is up 3.28% vs. one year ago and demand is currently 1.94% above the five year average.
The attractiveness of making new hedges increased on the week as prices were lower. Speculation was higher on the week making new hedges involve more competition with speculators for new long positions which is disadvantageous for the hedger. 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 January 3rd.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of January 3rd.
Factors affecting the market on the period were:
During the week ended December 27th, total petroleum inventories decreased by 1.12 million barrels vs. a five year average increase of 2.22 million barrels and vs. an expected increase of 1.10 million barrels. Inventories decreased by 3.34 million barrels vs. the five year average. Total inventories stand at 700.4 million barrels, down from 701.6 million barrels at the end of the previous week. The five year average inventory is 697.5 million barrels, up from 695.3 million barrels at the end of the previous week.
Current inventories are 0.42% larger than the five year average down from +0.90% 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 December 31st, the net speculative long position in petroleum futures was 351,625,000 barrels up 20,316,000 barrels (+6.13%) from the previous week. Speculation increased for the second week in a row and represents 50.20% of domestic inventories. Speculation is 15.17% above its one year moving average and is 18.02% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on December 31st was 307.72 cents per gallon, down 0.11 cents from 307.83 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 77.23% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 55.11% of the price movement of diesel fuel is explained by changes in levels of speculation. This statistical relationship continues to strengthen 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 260.87 cents per gallon or 46.84 cents per gallon less than current prices. The analysis would indicate that about 15.22% 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 305 million barrels, which was up about 2 million barrels on the week.
The graph below is three year history of speculative position levels.
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, natural gas, and electricity on a nationwide basis.