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Prices Higher - Speculation Up - OPEC Record Production - Inventory Up
During the week ending January 29th,the spot month diesel futures price increased by 5.94 cents per gallon (+5.97%) while the deferred months increased by 7 to 9 cents per gallon making the forward pricing curve higher and more positively sloped. The one year forward price ended the week at a 24.01 cent premium to the spot price, from a premium of 21.32 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates higher demand expectations and higher supplies with respect to demand. Demand includes speculative demand which was 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 29th, the spot month gasoline futures price increased by 1.93 cents per gallon (+1.78%) while the deferred months increased by 2 to 8 cents per gallon making the forward pricing curve mostly higher and more positively sloped. The one year forward price ended the week at a 5.84 cent premium to the spot price, from a premium of 1.82 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and higher inventory levels with respect to supply and demand.
The US dollar was steady on the week which is neutral for price. Inventories on the week were higher and higher than expected which is negative for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was higher on the week which is positive for price. US domestic crude production was lower which is positive for price. Domestic production is up 0.09% year over year up from +0.53% year over year during the previous week.
Weekly US petroleum demand increased by 5.63% during the week ending January 22nd. Domestic demand is down 1.72% vs. one-year ago and demand is currently 0.06% above the five year average.
Domestic production decreased slightly on the week. The number of operating oil drilling rigs in the US decreased by 12 on the week to levels last seen in April 2010. A lower rig count is positive for price. The lower rig count is expected to cause US production to move downward as part of the global rebalancing of supply and demand.
OPEC production is up 0.15% from December to January (48,000 barrels per day) and is up 8.91% year over year at a new all-time high level or production. The imbalance in supply and demand is expected to last longer that was first thought and into 2016 and perhaps beyond. This will keep prices low for the short to medium-term. As global demand grows to meet supply and the market becomes balanced, prices will increase. If demand does not grow as quickly as expected, prices will remain low longer.
Below is the one-year chart of spot diesel futures prices as of January 29th.
Below is the one-year chart of spot gasoline futures prices as of January 29th.
: : Inventories increased by 7.79 million barrels while inventories were expected to decrease by 3.07 million barrels on the week. The five-year average inventory increased by 4.06 million barrels. Inventories increased vs. the five year average and vs. expectations. The global market continues to be oversupplied by 1.5 to 2.0 million barrels per day which, along with large global inventories, will keep downward pressure on prices. This is expected to persist through 2016.
The chart below shows supply and demand history and expectations. When supply and demand again rebalance, prices will increase from current levels.
: : Stock market increasing by 1.75% on the week is generally positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.03% 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.
Below is the one-year chart US stock market prices as of January 29th.
Below is the one-year chart for the US dollar index as of January 29th.
During the week ended January 22nd, total petroleum inventories increased by 7.79 million barrels vs. a five year average increase of 4.06 million barrels and vs. an expected increase of 3.07 million barrels. Inventories increased by 3.73 million barrels vs. the five year average and increased by 4.72 million barrels vs. expectations. Total inventories stand at 903.9 million barrels, up from 896.1 million barrels at the end of the previous week. The five year average inventory is 735.2 million barrels, up from 731.1 million barrels at the end of the previous week.
Current inventories are 22.94% higher than the five year average, up from +22.56 at the end of the previous week.
As of January 26th, the net speculative long position in petroleum futures was 106,369,000 barrels, up 29,671,000 barrels (+38.69%) from the previous week. Speculation increased for the second week in a row and exceeded 100 million barrels for the first time since November 10th. Current speculation represents 11.77% of domestic inventories. Speculation is 33.41% below its one year moving average. The corresponding spot month diesel futures price on January 26th was 96.77 cents per gallon, up 5.90 cents from 90.87 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 85.11% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 72.43% of diesel fuel price movements are explained by changes in level of speculation. With the current over supply situation and the expectation that this will persist, long-side speculation will remain relatively low.
The net speculative long position has been variable over the past year ranging between 57 million and 285 million barrels with an average of about 160 million barrels, which is down about 3 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, the market price for spot month diesel futures is estimated to be 108.81 versus the actual price of 96.77. This indicates that the market is currently undervalued by 12.04 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.