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Speculation Up - Prices Down - Rig Count Up - Inventory Up
During the week ending January 27th, the spot month diesel futures price decreased by 2.70 cents per gallon (-1.64%) while the deferred months decreased by 3 to 5 cents per gallon making the forward pricing curve lower and less positively sloped. The one year forward price ended the week at a 10.47 cent premium to the spot price, from a premium of 11.84 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and lower inventories with respect to demand. Demand includes speculative demand which increased 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 27th, the spot month gasoline futures price decreased by 3.89 cents per gallon (-2.48%) while the deferred months decreased by 2 to 8 cents per gallon making the forward pricing curve lower and relatively unchanged in slope. The one year forward price ended the week at a 1.38 cent premium to the spot price, from a premium of 0.39 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and relatively steady inventory levels with respect to supply and demand. Demand includes speculative demand which was higher on the week.
The US dollar was lower on the week which is positive for price. Inventories on the week were higher which is negative for price. The stock market, as a proxy for demand expectations, was higher which is negative for price. Speculation was higher on the week which is positive for price. US domestic crude production was higher which negative for price. Domestic production is down 2.82% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was sharply on the week which is negative for price.
Weekly US petroleum demand decreased by 9.97% during the week ending January 20th. Domestic demand is down -2.62% vs. one-year ago and demand is currently 3.67% below the five year average.
Domestic production increased for the second week and is 2.82% below year ago levels. The number of operating oil drilling rigs in the US increased by 15 and stands at 566. This is 250 more than the recent low of 316 and 64.82% lower than the peak of 1609 in October 2014. The increasing rig count is causing US production to stabilize and grow as the global rebalancing of supply and demand continues. US domestic production has decreased by 258,000 barrels per day since the beginning of the year and 649,000 barrels per day since the peak of 9.61 million barrels per day in June 2015.
Below is the one-year chart of spot diesel futures prices as of January 27th.
Below is the one-year chart of spot gasoline futures prices as of January 27th.
MARKET FACTORS & COMMENTARY:
: : Inventories increased by 9.71 million barrels while inventories were expected to increase by 1.81 million barrels on the week. The five-year average inventory increased by 4.19 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : The Stock market increased by +1.03% which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -0.21% on the week 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.
SUPPLY & DEMAND:
The charts below show supply and demand history and expectations for December and January. Supply and demand are in the process of re-balancing which is the main cause of steady to higher price levels over the past 6 months. The January forecast shows a more balanced market than the December forecast due to expected OPEC cuts.
Below is the one-year chart US stock market prices as of January 27th.
Below is the one-year chart for the US dollar index as of January 27th.
During the week ended January 20th, total petroleum inventories increased by 9.71 million barrels vs. a five year average increase of 4.19 million barrels and vs. an expected increase of 1.81 million barrels. Inventories increased by 5.52 million barrels vs. the five year average and increased by 7.90 million barrels vs. expectations. Total inventories stand at 910.7 million barrels, up from 900.1 million barrels at the end of the previous week. The five year average inventory is 737.3 million barrels, up from 733.1 million barrels at the end of the previous week.
Current inventories are 23.51% higher than the five year average, up from +22.89% at the end of the previous week.
As of January 24th, the net speculative long position in petroleum futures was 467,428,000 barrels, up 19,701,000 barrels (+4.40%) from the previous week. Speculation has increased for 9 of the past 10 weeks and represents 51.33% of domestic inventories. Speculation is 92.62% above its one year moving average. The corresponding spot month diesel futures price on January 24th was 164.15 cents per gallon, down 0.71 cents from 164.86 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 77.67% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 60.32% of diesel fuel price movements are explained by changes in level of speculation.
The net speculative long position has been variable over the past year ranging between 89 million and 468 million barrels with an average of about 243 million barrels, which is up about 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 24th, the market price for spot month diesel futures is estimated to be 147.46 versus the actual price of 164.15. This indicates that the market is currently overvalued by 16.69 cents per gallon given the assumptions of the pricing model. This overvaluation is up 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.