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Prices Higher - Inventories Lower - Speculation Higher - Production Unchanged
During the week ending February 7th, the spot month diesel futures price increased by 5.32 cents per gallon (+1.78%) while the deferred months increased by 5 to 8 cents making the forward pricing curve higher and relatively unchanged in sloped. The one year forward price ended the week at a 14.47 cent (4.74%) discount to the spot price, from a discount of 42.58 cents (12.98%) and the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates higher demand expectations and steady supplies with respect to demand. 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 February 7th, the spot month gasoline futures price increased by 11.75 cents per gallon (+4.47%) while the deferred months increased by 7 to 11 cents per gallon making the forward pricing curve higher and virtually unchanged in slope. The one year forward price ended the week at a 17.91 cent (6.97%) discount to the spot price, from a discount of 14.97 cents (6.04%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and steady inventory levels with respect to supply and demand.
The US dollar was lower on the week which is positive for price. Inventories on the week were lower which is positive 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 unchanged on the week.
Weekly US petroleum demand decreased by 4.67% during the week ending January 31st. Demand is up 4.97% vs. one-year ago and demand is currently 2.84% above the five year average. Stronger than expected heating fuel demand continues to support near-term demand.
The attractiveness of making new hedges decreased slightly on the week as prices were higher. Speculation was higher as well which causes hedging to involve an increased level of competition with speculators for long positions which is disadvantageous for the long-hedger. 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 February 7th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of February 7th.
Factors affecting the market on the period were:
During the week ended January 31st, total petroleum inventories decreased by 1.42 million barrels vs. a five year average increase of 3.74 million barrels and vs. an expected increase of 1.00 million barrels. Inventories decreased by 5.15 million barrels vs. the five year average. Total inventories stand at 706.8 million barrels, down from 708.2 million barrels at the end of the previous week. The five year average inventory is 726.2 million barrels, up from 722.5 million barrels at the end of the previous week.
Current inventories are 2.67% smaller than the five year average down from -1.97% at the end of the previous week. Inventories versus the five year average on a percentage basis are negative for the fifth 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. Current inventories will be closer to the five year average and not as high compared to it. Also, increased production in the U.S. over the past three years diminishes the need for large inventories since production is closer to consumption and the risk of disruption is lower.
As of February 4th, the net speculative long position in petroleum futures was 328,527,000 barrels up 20,788,000 barrels (+6.76%) from the previous week. Speculation increased for the second week in a row and represents 46.48% of domestic inventories. Speculation is 8.02% above its one year moving average and is 23.40% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on February 4th was 298.29 cents per gallon, down 13.89cents from 312.18 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 75.04% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 56.31% 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 261.49 cents per gallon or 36.80 cents per gallon less than current prices. The analysis would indicate that about 12.34% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up by about one 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 unchanged 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.