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Dollar Lower - Production Steady - Prices Lower - Stock Market Lower - Inventory Higher - Rig Count Higher
During the week ending January 25th, the spot month diesel futures price decreased by 2.41 cents per gallon (-1.26%) while the deferred months decreased by 0 to 2 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 4.74 cent premium to the spot price, from a premium of 3.02 cents at the end of the previous week.
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 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 25th, the spot month gasoline futures price decreased by 6.34 cents per gallon (-4.36%) while the deferred months decreased by 2 to 6 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 9.39 cent premium to the spot price, from a premium of 5.56 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates lower current demand expectations and higher 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 2.86% during the week ending January 18th. Domestic demand is down by 1.08% vs. one-year ago and demand is currently 3.06% above the five year average.
Domestic production was steady on the week remaining at the new all-time high. Domestic production is 20.47% above year ago levels. The number of operating oil drilling rigs in the US increased from 852 to 862 on the week. Currently, this is 546 more than the low of 316 rigs in 2016 and 46.43% 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 25th.
Below is the one-year chart of spot gasoline futures prices as of January 25th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 11.40 million barrels while inventories were expected to increase by 3.51 million barrels on the week. The five-year average inventory increased by 4.72 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : Oil declined amid growing concerns that slowing growth in China and the global economy in general will undermine overall crude oil demand.
: : Growing concerns about global economic growth and slowing petroleum demand growth were offset by American sanctions on Venezuelan crude oil. While not expected to cause a supply squeeze, any Venezuelan barrels off of the market will be supportive of price. It is expected that production outside of Venezuela will make up any decreases in Venezuelan exports.
: : The Stock market decreased by -0.22% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.56% on the week which is positive 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:
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 25th.
Below is the one-year chart for the US dollar index as of January 25th.
During the week ended January 18th, total petroleum inventories increased by 11.40 million barrels vs. a five year average increase of 4.72 million barrels and vs. an expected increase of 3.51 million barrels. Inventories increased by 6.69 million barrels vs. the five year average and increased by 7.89 million barrels vs. expectations. Total inventories stand at 847.0 million barrels, up from 835.6 million barrels at the end of the previous week. The five year average inventory is 800.0 million barrels, up from 795.3 million barrels at the end of the previous week.
Current inventories are +5.88% versus the five year average, up from +5.08% 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 22nd, the market price for spot month diesel futures is estimated to be 138.19 versus the actual price of 190.11. This indicates that the market is currently overvalued by 51.92 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.