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Spot Prices Spike - Inventories Steady - Speculation Lower - Production Lower
During the week ending January 24th, the spot month diesel futures price increased by 11.37 cents per gallon (+3.76%) while the deferred months increased by 1 to 7 cents making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 26.30 cent (8.38%) discount to the spot price, from a discount of 16.97 cents (5.61%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates a near-term spike in demand due to cold weather while longer-term demand expectations were slightly higher and also indicates lower supplies with respect to demand again due to higher demand in the near-term due to winter distillate heating demand caused by colder than normal temperatures. 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 24th, the spot month gasoline futures price increased by 4.28 cents per gallon (+1.63%) while the deferred months increased by 1 to 4 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 15.44 cent (6.15%) discount to the spot price, from a discount of 12.99 cents (5.22%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand.
The US dollar was lower on the week which is positive 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 lower on the week which is negative for price. US domestic crude production decreased for the first time in five weeks which is slightly positive for price.
Weekly US petroleum demand increased by 0.54% during the week ending January 17th. Demand is up 2.45% vs. one year ago and demand is currently 1.16% below the five year average. This is the lowest reading versus the five year average in almost five months.
The attractiveness of making new hedges increased on the week was relatively unchanged. Speculation was relatively unchanged and forward prices increased slightly but remain at attractive levels. 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 24th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of January 24th.
Factors affecting the market on the period were:
During the week ended January 17th, total petroleum inventories decreased by 0.10 million barrels vs. a five year average increase of 2.59 million barrels and vs. an expected decrease of 1.40 million barrels. Inventories decreased by 2.69 million barrels vs. the five year average. Total inventories stand at 707.2 million barrels, down from 707.3 million barrels at the end of the previous week. The five year average inventory is 717.9 million barrels, up from 715.3 million barrels at the end of the previous week.
Current inventories are 1.48% smaller than the five year average down from -1.11% at the end of the previous week. Inventories versus the five year average on a percentage basis are negative for the third week in a row and the lowest level versus the five year average since August of 2012. The five year average inventory has grown over the past five years. Thus, it is less likely that current inventories will remain as far above the five year level as we have seen in the past five years. Current inventories are reverting to the rolling average as would be expected.
As of January 21st, the net speculative long position in petroleum futures was 268,408,000 barrels down 2,158,000 barrels (-0.80%) from the previous week. Speculation decreased for the third week in a row and represents 37.95% of domestic inventories. Speculation is 11.96% below its one year moving average and is 37.42% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on January 21st was 301.47 cents per gallon, up 7.84 cents from 293.63 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 75.33% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 56.74% 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 260.32 cents per gallon or 41.15 cents per gallon less than current prices. The analysis would indicate that about 13.65% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up by about half a cent 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 down about 1 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.