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Spot Prices Spike - Inventories Higher - Speculation Higher - Production Lower
During the week ending January 31st, the spot month diesel futures price increased by 14.20 cents per gallon (+4.53%) while the deferred months decreased by 1 to 3 cents making the forward pricing curve lower except for the spot month and relatively unchanged in sloped. The one year forward price ended the week at a 42.58 cent (12.98%) discount to the spot price, from a discount of 26.30 cents (8.38%) and the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates a near-term spike in demand due to cold weather while longer-term demand expectations were slightly lower. It also indicates steady supplies with respect to demand beyond the spot month. 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 31st, the spot month gasoline futures price decreased by 3.60 cents per gallon (-1.35%) while the deferred months decreased by 2 to 4 cents per gallon making the forward pricing curve lower and unchanged in slope. The one year forward price ended the week at a 14.97 cent (6.04%) discount to the spot price, from a discount of 15.44 cents (6.15%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and steady inventory levels with respect to supply and demand.
The US dollar was higher on the week which is negative for price. Inventories on the week were higher which is negative for price. The stock market, as a proxy for demand expectations, was lower which is negative for price. Speculation was higher on the week which is positive for price. US domestic crude production decreased for the second week in a rwo which is positive for price.
Weekly US petroleum demand increased by 5.74% during the week ending January 24th. Demand is up 4.18% vs. one-year ago and demand is currently 0.85% above the five year average. Stronger than expected heating fuel demand is a significant portion of this increase in demand.
The attractiveness of making new hedges increased slightly on the week as prices were slightly lower. Speculation was higher which causes hedging to involve an increased level of competition with speculators for long positions. 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 31st.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of January 31st.
Factors affecting the market on the period were:
During the week ended January 24th, total petroleum inventories increased by 1.02 million barrels vs. a five year average increase of 4.63 million barrels and vs. an expected increase of 1.80 million barrels. Inventories decreased by 3.61 million barrels vs. the five year average. Total inventories stand at 708.2 million barrels, up from 707.2 million barrels at the end of the previous week. The five year average inventory is 722.5 million barrels, up from 717.9 million barrels at the end of the previous week.
Current inventories are 1.97% smaller than the five year average down from -1.48% at the end of the previous week. Inventories versus the five year average on a percentage basis are negative for the fourth week in a row and the lowest level versus the five year average since September 2010. 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 28th, the net speculative long position in petroleum futures was 307,739,000 barrels up 39,331000 barrels (+14.65%) from the previous week. Speculation increased for the first time in four weeks and represents 43.45% of domestic inventories. Speculation is 1.11% above its one year moving average and is 28.25% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on January 28th was 312.18 cents per gallon, up 10.71cents from 301.47 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 74.20% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 55.05% 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 260.77 cents per gallon or 51.41 cents per gallon less than current prices. The analysis would indicate that about 16.47% 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 304 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.