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Lower Prices - Rig Count Higher - Speculation Higher - Production Unchanged - Stock Market Lower - Inventory Higher - Dollar Higher
During the week ending January 24th, the spot month diesel futures price decreased by 12.52 cents per gallon (-6.73%) while the deferred months decreased by 6 to 12 cents per gallon making the forward pricing curve lower and positively sloped for the first twelve months. The one year forward price ended the week at a 3.37 cent premium to the spot price, from a discount of 0.97 cents at the end of the previous week. This is a one-year low.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and higher inventories with respect to demand. Demand also includes speculation which was slightly 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.
During the week ending January 24th, the spot month gasoline futures price decreased by 12.54 cents per gallon (-7.64%) while the deferred months decreased by 8 to 13 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at an 8.51 cent discount to the spot price, from a discount of 11.44 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.
Weekly US petroleum demand increased by 12.93% during the week ending January 17th. Domestic demand is down by 1.63% vs. one-year ago and demand is currently 3.11% below the five year average.
Domestic production remained at its all-time high of 13.0 million barrels per day on the week. Domestic production is 9.25% above year ago levels. The number of operating oil drilling rigs in the US increased by 3 from 673 to 676. The recent decline in US rig count is due to a pause in further investment in exploration and production. US domestic production has increased by 4,572,000 barrels per day (+54.25%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of January 24th.
Below is the one-year chart of spot gasoline futures prices as of January 24th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 0.16 million barrels while inventories were expected to increase by 5.52 million barrels on the week. The five-year average inventory increased by 6.79 million barrels. Inventories decreased vs. expectations and vs. the five year average.
: : The Coronavirus in China and its potential spread has reduced demand expectations for petroleum in China and for the global market. China has quarantined a number of cities which cuts demand for transportation fuels. Goldman Sachs is estimating that this virus could cause demand to decrease by 260,000 barrels per day in 2020. This virus is outweighing the effect of supply disruption in Libya.
: : Ample supplies in the global market has softened the effects of the closing of oil export ports in Libya effectively halting supply from Libya for the time being. Libya produces 1.17 million barrels per day. When this supply returns to the market, it will increase supply on the global market and may further soften prices.
: : With the rapid decrease in price and the potential loss of global demand due to the coronavirus and given ample supply in the market otherwise, OPEC is discussing extending their latest round of supply cuts through the end of 2020. This may be supportive of prices in the short to medium-term.
: : The Stock market decreased by +1.03% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.25% 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 and prices decrease accordingly. Conversely, a weaker dollar increases relative demand for commodities and prices increase.
OPEC Production Five Year History – down 90,000 barrels per day in December. This low level of OPEC production continues to be supportive of price.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of January 2020. The chart shows the expectation of a roughly balanced market through 2021 with the exception of second quarter of 2020. This forecast is similar to the December forecast over the next year. If we see the projected 900,000 barrel per day surplus in the second quarter of 2020, this will negatively affect price.
Below is the one-year chart of the US stock market as of January 24th.
Below is the one-year chart of the US stock market as of January 24th.
During the week ended January 17th, total petroleum inventories increased by 0.16 million barrels vs. a five year average increase of 6.97 million barrels and vs. an expected increase of 5.52 million barrels. Inventories decreased by 6.64 million barrels vs. the five year average and decreased by 5.36 million barrels vs. expectations. Total inventories stand at 834.2 million barrels, up from 834.0 million barrels at the end of the previous week. The five year average inventory is 834.0 million barrels, up from 827.2 million barrels at the end of the previous week.
Current inventories are +0.03% versus the five year average, a decrease on the week from +0.83%. Inventories have been greater than the five year average for the past two weeks and inventories have decreased vs. the five year average for the first time in three weeks. This is positive for price.
As of January 21st, the net speculative long position in petroleum futures was 348,964,000 barrels, up 10,322,000 barrels (+3.05%) from the previous week. Speculation increased for the first time in two weeks and represents 41.83% of domestic inventories. Speculation is 24.32% above its one year moving average. The corresponding spot month diesel futures price on January 21st was 182.92 cents per gallon, down -8.11 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 66.30% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 43.96% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation decreased significantly from the previous week.
The net speculative long position has been variable over the past year ranging between 149 million and 431 million barrels with an average of about 281 million barrels, which is up 4 million barrels on the week.
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.