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Prices Mixed/Steady - Rig Count Lower - Speculation Up - OPEC - Production Lower - Stock Market Higher - Inventory Lower - Dollar Higher
During the week ending March 29th, the spot month diesel futures price increased by 0.75 cents per gallon (+0.38%) while the deferred months varied from +1 to -1 cent per gallon making the forward pricing curve steady and less positively sloped. The one year forward price ended the week at a 3.96 cent premium to the spot price, from a premium of 4.81 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates steady demand expectations and lower inventories with respect to demand. Demand also includes speculation which was higher 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 29th, the spot month gasoline futures price decreased by 3.03 cents per gallon (-1.57%) while the deferred months varied between +2 and -1 cents per gallon making the forward pricing curve steady and less negatively sloped. The one year forward price ended the week at a 6.47 cent discount to the spot price, from a discount of 10.93 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates steady demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.
Weekly US petroleum demand decreased by 6.34% during the week ending March 22nd. Domestic demand is down by 0.09% vs. one-year ago and demand is currently 6.69% above the five year average.
Domestic production remained unchanged for the week ending March 22nd at 12.1 million barrels per day. Domestic production is 15.98% above year ago levels. The number of operating oil drilling rigs in the US decreased by 8 from 824 to 816 on the week. Currently, this is 500 more than the low of 316 rigs in 2016 and 49.29% lower than the peak of 1609 in October 2014. This relatively high rig count is causing US production to generally grow and is a factor in buffering supply disruptions in other parts of the world. The recent decline in US rig count is due to relatively low prices and a pause in further investment in exploration and production. US domestic production has increased by 3,672,000 barrels per day (+43.57%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of March 29th.
Below is the one-year chart of spot gasoline futures prices as of March 29th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories decreased on the week by 2.16 million barrels while inventories were expected to decrease by 4.26 million barrels on the week. The five-year average inventory decreased by 2.43 million barrels. Inventories increased vs. expectations and vs. five year average.
: : The situation in Venezuela continues to worsen and oil supplies from that country continue to fall. This is due to more and more of those involved in the production of oil leaving the country and power outages which causes oil pumps running on electricity to stop. This situation continues to be negative for supply and positive for price.
: : There was more optimism during the week that a trade agreement between the US and China would be forthcoming sooner rather than later. This trade war continues to weigh on global economic growth expectations, global petroleum demand expectations, and petroleum prices.
: : OPEC and Friends are expected to continue their production cuts in their continued effort to support price and not allow global inventories to grow.
: : Russia’s compliance with agreed upon cuts has improved since February with production decreasing by about 56,000 barrels per day. This is negative for supply and positive for price.
: : The Stock market increased by +1.20% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.65% 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 295,000 barrels per day in March in a continued response to lower prices and fears of oversupply. Most of this decrease came again from Saudi Arabia (down 280,000 barrels per day) and Venezuela (down 180,000 barrels per day). Continued OPEC cuts are supportive of price. OPEC production remaining at a four year low as OPEC cedes market share to US shale producers in order to support price.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of March 2019. The chart shows the expectation of varying levels of surplus through 2020 and a slight deficit for Q1 2019. This forecast shows a slightly lower surplus for 2019-2020 than the February forecast showed due in part to the continuing efforts of OPEC and other producers to limit supply. This is supportive of price.
Below is the one-year chart US stock market prices as of March 29th.
Below is the one-year chart for the US dollar index as of March 29th.
During the week ended March 22nd, total petroleum inventories decreased by 2.16 million barrels vs. a five year average decrease of 2.43 million barrels and vs. an expected decrease of -4.26 million barrels. Inventories increased by 0.27 million barrels vs. the five year average and increased by 2.11 million barrels vs. expectations. Total inventories stand at 811.1 million barrels, down from 813.2 million barrels at the end of the previous week. The five year average inventory is 820.8 million barrels, down from 823.2 million barrels at the end of the previous week.
Current inventories are -1.18% versus the five year average, up from -1.21% at the end of the previous week. Inventory with respect to the five year average has declined in recent weeks and is at 7-month low levels. These lower inventories are the result of production cuts from OPEC and other producers in order to prop up price.
As of March 26th, the net speculative long position in petroleum futures was 334,971,000 barrels, up 27,229,000 barrels (+8.85%) from the previous week. Speculation increased for the fifth week and represents 41.30% of domestic inventories. Speculation is 13.93% below its one year moving average. The corresponding spot month diesel futures price on March 26th was 198.99 cents per gallon, down 0.05 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 69.32% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 48.05% 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 389 million barrels, which is down 5 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 26th, the market price for spot month diesel futures is estimated to be 162.70 versus the actual price of 198.99. This indicates that the market is currently overvalued by 36.29 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.