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Prices Lower - Speculation Higher - Weaker Labor Market
During the week ending April 5th, the spot month heating oil futures price decreased by 13.72 cents per gallon (-4.50%) while the deferred months decreased by 7 to 13 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 1.73 cent (0.59%) discount to the spot price, from a discount of 7.52 cents (2.47%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates lower demand expectations and higher supplies with respect to demand. Demand includes speculative demand which increased on the week and can be volatile. 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 April 5th, the spot month gasoline futures price decreased by 24.70 cents per gallon (-7.94%) while the deferred months decreased by 10 to 23 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 12.87 cent (4.71%) discount to the spot price, from a discount of 23.08 cents (8.03%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand.
A much weaker than expected US payroll report indicating new jobs created caused economic and petroleum demand expectations to decrease. The US dollar touched an 8 month high which is negative for price but was lower on the week. Inventories on the week were lower than expectations and remain above historical averages. The stock market was lower which is negative for price. Speculation was higher on the week which is supportive of price. US domestic crude production was unchanged on the week. Geopolitical risk with Iran and North Korea continues to be a background factor that is supportive of price.
Weekly US petroleum demand increased by 0.49% during the week ending March 29th. Demand is up 2.16% vs. one year ago and is 2.76% below the five year average.
The attractiveness of making new hedges increased on the week given the lower price environment. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive. Entering new, longer-term hedges at these levels would involve a relatively higher level of competition with speculators for long futures positions. Heating oil futures in the $2.80 - $2.90 has made hedging more advantageous depending on the goals of hedger.
Below is a one year chart of spot diesel futures prices, the proxy hedging mechanism for diesel fuel, as of April 5th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of April 5th.
Factors affecting the market on the period were:
During the week ended March 29th, total petroleum inventories decreased by 0.13 million barrels vs. a five year average increase of 2.00 million barrels and vs. an expected increase of 0.25 million barrels. Inventories decreased by 2.14 million barrels vs. the five year average. Total inventories stand at 722.3 million barrels, down from 722.4 million barrels at the end of the previous week. The five year average inventory is 709.0 million barrels, up from 707.0 million barrels at the end of the previous week.
Current inventories are 1.87% larger than the five year average down from +2.17% at the end of the previous week. Inventories versus the five year average on a percentage basis remain positive. This helps to mitigate the effects of supply disruption and decreases price volatility.
As of April 2nd, the net speculative long position in petroleum futures was 285,018,000 barrels up 7,868,000 barrels (+2.84%) from the previous week. The level of speculation increased for the third week in a row and represents 39.46% of domestic inventories despite sharply lower prices. Speculation is 11.98% above its one year moving average and is 20.79% below the 52 week high level. Levels have increased and remain at relatively levels. The corresponding spot month heating oil futures price on April 2nd was 308.74 cents per gallon, up 20.61 cents from 288.13 cents per gallon during the previous week. (Most of this 20 cent increase was due to the change in contract specifications from heating oil to diesel fuel).
Heating oil price and size of speculative net long position in petroleum are 79.82% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 63.71% of the price movement of heating oil is explained by changes in levels of speculation. This statistical relationship has stabilized and remains high. 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 heating oil futures price would be 236.26 cents per gallon or 72.48 cents per gallon less than current prices. The analysis would indicate that about 23.47% of current price is attributable to speculation and its underlying market rationale. The "would be" price was unchanged on the week.
The net speculative long position has been variable over the past year ranging between 70 million and 410 million barrels with an average of about 255 million barrels, down by roughly one million barrels on the week.
The graph below is three year history of speculative position levels.
Linwood Capital, LLC is an institutional fuel hedging management and consulting firm. Linwood creates and manages customized fuel hedging programs primarily for public clients on a nationwide basis.