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Prices Up - Production Up - Rig Count Lower - Speculation Delayed - Stock Market Higher - Inventory Higher - Dollar Lower
During the week ending February 22nd, the spot month diesel futures price increased by 1.08 cents per gallon (+0.53%) while the deferred months increased by 0 to 2 cents per gallon making the forward pricing curve higher and more positively sloped. The one year forward price ended the week at a 4.27 cent premium to the spot price, from a premium of 3.62 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher demand expectations and higher 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 22nd, the spot month gasoline futures price increased by 3.83 cents per gallon (+2.43%) while the deferred months increased by 2 to 4 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 1.08 cent premium to the spot price, from a premium of 1.80 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 increased by 8.40% during the week ending February 15th. Domestic demand is down by 0.12% vs. one-year ago and demand is currently 3.47% above the five year average.
Domestic production was higher on the week by 100,000 barrels per day to a new all-time high of 12 million barrels per day. Domestic production is 16.85% above year ago levels. The number of operating oil drilling rigs in the US decreased from 857 to 853 on the week. Currently, this is 537 more than the low of 316 rigs in 2016 and 46.99% 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 3,572,000 barrels per day (+42.38%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of February 22nd.
Below is the one-year chart of spot gasoline futures prices as of February 22nd.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 0.70 million barrels while inventories were expected to increase by 0.52 million barrels on the week. The five-year average inventory decreased by 2.19 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : Oil prices increased generally due to tighter supply expectations as OPEC + Friends continue to curb supply to balance the market and clear the glut caused by overproduction last year. They are doing this to avoid a price crash and to support prices.
: : Prices are also higher on the week because there is increased optimism that a deal will be struck with China and the trade war between the world’s largest economies will end which would unleash higher economic growth rates which would cause higher petroleum demand expectations and would be supportive of price. The US has delayed the tariff increase set to be imposed on March 1st due to substantial progress made in the negotiations. This means that the trade war will not likely escalate which is also positive for economic and petroleum demand growth expectations.
: : Russia has not cut its production as much as promised which means more supply which is negative for price. Russia is only 114,000 barrels per day below December production levels, should be about 150,000 below by now, and has promised to be 228,000 lower by the end of March.
: : 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 +0.62% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.41% on the week which 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.
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 22nd.
Below is the one-year chart for the US dollar index as of February 22nd.
During the week ended February 15th, total petroleum inventories increased by 0.70 million barrels vs. a five year average decrease of 2.19 million barrels and vs. an expected increase of 0.52 million barrels. Inventories increased by 2.89 million barrels vs. the five year average and increased by 0.18 million barrels vs. expectations. Total inventories stand at 850.0 million barrels, up from 849.3 million barrels at the end of the previous week. The five year average inventory is 816.4 million barrels, down from 818.6 million barrels at the end of the previous week.
Current inventories are +4.12% versus the five year average, up from +3.76% at the end of the previous week. Inventory with respect to the five year average has reversed its downward trend and increased for the first time in four weeks.
Due to government shutdown, the last reported speculation position was Tuesday February 5th.
As of February 5th, the net speculative long position in petroleum futures was 201,523,000 barrels, down 4,020,000 barrels (-1.96%) from the previous week. Speculation decreased for the first time in four weeks and represents 23.87% of domestic inventories. Speculation is 53.60% below its one year moving average. The corresponding spot month diesel futures price on February 5th was 189.75 cents per gallon, unchanged from the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 47.93% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 22.97% of diesel fuel price movements are explained by changes in level of speculation. One-year correlation has continued to increase in the past weeks.
The net speculative long position has been variable over the past year ranging between 134 million and 614 million barrels with an average of about 434 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 February 5th, the market price for spot month diesel futures is estimated to be 143.82 versus the actual price of 189.75. This indicates that the market is currently overvalued by 45.93 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.