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Dollar Higher - Production Higher - Prices Higher - Stock Market Higher - Inventory Higher - Rig Count Lower
During the week ending January 18th, the spot month diesel futures price increased by 3.63 cents per gallon (+1.93%) while the deferred months increased by 1 to 4 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 3.02 cent premium to the spot price, from a premium of 3.37 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher demand expectations and lower inventories with respect to demand. Demand also includes speculation which was not known because of the government shutdown. 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 18th, the spot month gasoline futures price increased by 5.21 cents per gallon (+3.72%) while the deferred months increased by 1 to 5 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 5.56 cent premium to the spot price, from a premium of 8.05 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates higher current demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was unknown due to the government shutdown.
Weekly US petroleum demand increased by 5.57% during the week ending January 11th. Domestic demand is down by 2.12% vs. one-year ago and demand is currently 2.44% above the five year average.
Domestic production increased by 200,000 barrels per day on the week to a new all-time high. Domestic production is 22.05% above year ago levels. The number of operating oil drilling rigs in the US decreased sharply from 873 to 852 on the week. This was the largest one week drop in rig count in three years. Currently, this is 536 more than the low of 316 rigs in 2016 and 47.08% lower than the peak of 1609 in October 2014. This high rig count is causing US production to generally grow and is a factor in buffering supply disruptions in other parts of the world. US domestic production has increased by 3,472,000 barrels per day (+41.20%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of January 18th.
Below is the one-year chart of spot gasoline futures prices as of January 18th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 7.79 million barrels while inventories were expected to increase by 2.36 million barrels on the week. The five-year average inventory increased by 3.00 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : Optimism for efforts between the US and China to reach a trade deal may have decreased with a quick end to the trade dispute apparently not immediately at hand. This is negative for global economic growth expectations especially in China and the US, the world’s two largest economies. This, along with China reporting that 2018 was its slowest economic growth rate since 1990 is negative for petroleum demand expectations and price.
: : OPEC cut more in December than was initially reported. This tightening of supply is supportive of price.
: : The waivers granted by the US regarding adherence with Iranian sanctions will expire in early May. The current thinking is that the US will not be renewing these waivers. This is the equivalent of taking oil off of the global market which is supportive of price.
: : The Stock market increased by +2.87% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.70% 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.
OPEC Production Five Year History – Down 530,000 barrels per day in December in response to lower prices and fears of oversupply. Most of this decrease came from Saudi Arabia (420 kbbl/day) as they had raised production earlier in the year responding to the possibility of a supply shortage due to the Iranian sanctions that turn out to not be consequential.
SUPPLY & DEMAND:
Government shut-down has caused this graph not to be updated.
The chart below shows supply and demand history and expectations as of January 2019. The chart shows the expectation of varying levels of surplus through 2020. This expectation is what has kept prices from advancing further and what will most likely mitigate upward price movement over the next two years.
Below is the one-year chart US stock market prices as of January 18th.
Below is the one-year chart for the US dollar index as of January 18th.
During the week ended January 11th, total petroleum inventories increased by 7.79 million barrels vs. a five year average increase of 3.00 million barrels and vs. an expected increase of 2.36 million barrels. Inventories increased by 4.79 million barrels vs. the five year average and increased by 5.43 million barrels vs. expectations. Total inventories stand at 835.6 million barrels, up from 827.8 million barrels at the end of the previous week. The five year average inventory is 795.3 million barrels, up from 792.3 million barrels at the end of the previous week.
Current inventories are +5.08% versus the five year average, up from +4.49% at the end of the previous week. This is the highest inventories have been with respect to the five year average since December 2017. This slow build with respect to the five year average is negative for price.
Due to government shutdown, the last reported speculation position was Friday December 21st.
As of 12/21/18, speculation drops for the 11th week in a row to an 18-month low.
As of December 18th, the net speculative long position in petroleum futures was 155,905,000 barrels, down 22,264,000 barrels (-12.50%) from the previous week. Speculation decreased for the eleventh week and represents 19.70% of domestic inventories. Speculation is 68.65% below its one year moving average. The corresponding spot month diesel futures price on December 18th was 175.39 cents per gallon, down 9.32 cents from 184.71 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 12.24% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 1.50% of diesel fuel price movements are explained by changes in level of speculation. One-year correlation has increased in the past weeks.
The net speculative long position has been variable over the past year ranging between 155 million and 703 million barrels with an average of about 497 million barrels, which is down 7 million barrels on the week.
Based on a multiple regression analysis considering the level of the dollar, speculation, and inventory over the past five years as of January 15th, the market price for spot month diesel futures is estimated to be 143.89 versus the actual price of 187.22. This indicates that the market is currently overvalued by 43.33 cents per gallon given the assumptions of the pricing model.
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.