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Prices Up - Production Steady - Rig Count Higher - Speculation Delayed - Stock Market Higher - Inventory Higher - Dollar Higher
During the week ending February 15th, the spot month diesel futures price increased by 11.18 cents per gallon (+5.86%) while the deferred months increased by 6 to 12 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 3.62 cent premium to the spot price, from a premium of 4.50 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher demand expectations and lower 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 February 15th, the spot month gasoline futures price increased by 12.65 cents per gallon (+8.75%) while the deferred months increased by 6 to 12 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 1.80 cent premium to the spot price, from a premium of 4.61 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates higher current demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was unknown due to the government shutdown.
Weekly US petroleum demand decreased by 12.47% during the week ending February 8th. Domestic demand is up by 0.56% vs. one-year ago and demand is currently 8.18% above the five year average.
Domestic production was steady on the week remaining at the new all-time high. Domestic production is 15.86% above year ago levels. The number of operating oil drilling rigs in the US increased from 854 to 857 on the week. Currently, this is 541 more than the low of 316 rigs in 2016 and 46.74% 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 February 15th.
Below is the one-year chart of spot gasoline futures prices as of February 15th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 5.23 million barrels while inventories were expected to increase by 1.13 million barrels on the week. The five-year average inventory increased by 5.72 million barrels. Inventories decreased vs. the five year average and increased vs. expectations.
: : Oil prices increased generally due to tighter supply expectations as OPEC + Friends cut supply to avoid a price crash and to support prices and due to higher demand expectations as the China-US trade situation improves which, if accomplished, would cause higher petroleum demand growth.
: : Saudi Arabia/OPEC/Russia vowing to cut supply further in order to support price and effectively cede market share to other producers mainly American shale producers. Russia indicated that it will accelerate its cuts.
: : Venezuelan oil that has effectively been shut off from the US because of US sanctions on Venezuela is finding a market in India. This puts Venezuelan oil back on the global market and effectively boosts global supply which is negative for price.
: : The Stock market increased by +2.50% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by +0.28% on the week which 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.
OPEC Production Five Year History – Down 1,530,000 barrels per day in January in response to lower prices and fears of oversupply. Most of this decrease came from Saudi Arabia (450 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 February 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. This forecast shows a slightly higher surplus for 2019-2020 than the January forecast.
Below is the one-year chart US stock market prices as of February 15th.
Below is the one-year chart for the US dollar index as of February 15th.
During the week ended February 8th, total petroleum inventories increased by 5.23 million barrels vs. a five year average increase of 5.72 million barrels and vs. an expected increase of 1.13 million barrels. Inventories decreased by 0.49 million barrels vs. the five year average and increased by 4.10 million barrels vs. expectations. Total inventories stand at 849.3 million barrels, up from 844.1 million barrels at the end of the previous week. The five year average inventory is 818.6 million barrels, up from 812.8 million barrels at the end of the previous week.
Current inventories are +3.76% versus the five year average, down from +3.85% at the end of the previous week. Inventory with respect to the five year average has fallen for the third week which is supportive for price.
Due to government shutdown, the last reported speculation position was Tuesday January 22nd.
As of January 22nd, the net speculative long position in petroleum futures was 182,667,000 barrels, up 16,539,000 barrels (+9.96%) from the previous week. Speculation increased for the second week and represents 21.56% of domestic inventories. Speculation is 59.65% below its one year moving average. The corresponding spot month diesel futures price on January 22nd was 190.11 cents per gallon, up 2.89 cents from 187.22 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 41.61% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 17.31% 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 134 million and 703 million barrels with an average of about 453 million barrels, which is down 9 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 140.44 versus the actual price of 190.11. This indicates that the market is currently overvalued by 49.67 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.