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Speculation Down - Prices Down - Rig Count Up - Inventory Down
During the week ending March 10th, the spot month diesel futures price decreased by 9.00 cents per gallon (-5.65%) while the deferred months decreased by 6 to 10 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 8.44 cent premium to the spot price, from a premium of 8.36 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and higher inventories with respect to demand. Demand includes speculative demand which decreased 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 March 10th, the spot month gasoline futures price decreased by 5.30 cents per gallon (-3.21%) while the deferred months decreased by 4 to 6 cents per gallon making the forward pricing curve lower and less positively sloped over the next year. The one year forward price ended the week at a 1.76 cent premium to the spot price, from a premium of 3.94 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and lower inventory levels with respect to supply and demand. Demand includes speculative demand which was lower on the week.
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 lower which is negative for price. Speculation was lower on the week which is negative for price. US domestic crude production was higher which negative for price. Domestic production is now positive year over year and is up 0.11% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was up on the week which is negative for price.
Weekly US petroleum demand increased by 2.07% during the week ending March 3rd. Domestic demand is down -1.33% vs. one-year ago and demand is currently 5.13% above the five year average.
Domestic production increased for the third week and is 0.11% above year ago levels. This is the first time in 14 months that US domestic production has been positive on a year-over-year basis. The number of operating oil drilling rigs in the US increased by 8 and stands at 617. This is 301 more than the recent low of 316 and 61.65% lower than the peak of 1609 in October 2014. The increasing rig count is causing US production to stabilize and grow as the global rebalancing of supply and demand continues. US domestic production has decreased by 131,000 barrels per day since the beginning of the year and 522,000 barrels per day since the peak of 9.61 million barrels per day in June 2015.
Below is the one-year chart of spot diesel futures prices as of March 10th.
Below is the one-year chart of spot gasoline futures prices as of March 10th.
MARKET FACTORS & COMMENTARY:
: : Inventories decreased by 1.02 million barrels while inventories were expected to decrease by 1.24 million barrels on the week. The five-year average inventory increased by 0.19 million barrels. Inventories decreased vs. the five year average and increased vs. expectations.
: : The market has declined amid US inventories that have continued to increase despite Russia and OPEC's cuts in production.
: : US production has risen by roughly 500,000 barrels per day since October which has mitigated OPEC's efforts to balance the global supply and demand for crude oil at higher prices through production cuts. The increasing number of new wells being drilled in the US cause expectations of further increases in US production.
: : Petroleum speculation levels reached an all-time high on February 21st while prices did not increase to the extent that would be expected. Oil producers have been hedging their production at the elevated prices - basically selling it to speculators. Speculators have seen that prices will not be going significantly higher in the short term due to fundamental factors and thus are shedding some of their speculative positions. Prices have declined commensurately.
: : The Stock market decreased by -0.44% which is negative for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -0.29% on the week 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.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of March 2017. Supply and demand are in the process of re-balancing which is the main cause of steady to higher price levels over the past 6 months. This forecast shows a relatively balanced market in 2017 which generally indicates firmer and volatile prices moving forward.
Below is the one-year chart US stock market prices as of March 10th.
Below is the one-year chart for the US dollar index as of March 10th.
During the week ended March 3rd, total petroleum inventories decreased by 1.02 million barrels vs. a five year average increase of 0.19 million barrels and vs. an expected decrease of 1.24 million barrels. Inventories decreased by 1.21 million barrels vs. the five year average and increased by 0.21 million barrels vs. expectations. Total inventories stand at 939.3 million barrels, down from 940.3 million barrels at the end of the previous week. The five year average inventory is 749.1 million barrels, up from 748.9 million barrels at the end of the previous week.
Current inventories are 25.38% higher than the five year average, down from +22.55% at the end of the previous week.
As of March 7th, the net speculative long position in petroleum futures was 439,581,000 barrels, down 19,421,000 barrels (-4.23%) from the previous week. Speculation has decreased for the second weed and represents 46.80% of domestic inventories. Speculation is 55.90% above its one year moving average. The corresponding spot month diesel futures price on March 7th was 161.39 cents per gallon, down 0.69 cents from 162.08 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 73.25% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 53.66% of diesel fuel price movements are explained by changes in level of speculation.
The net speculative long position has been variable over the past year ranging between 89 million and 488 million barrels with an average of about 282 million barrels, which is up about 7 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 March 7th, the market price for spot month diesel futures is estimated to be 134.99 versus the actual price of 161.39. This indicates that the market is currently overvalued by 26.40 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.