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Prices Higher - Inventory Up - Rig Count Down - Dollar Up - Spec Up
During the week ending April 10th, the spot month diesel futures price increased by 8.36 cents per gallon (+4.97%) while the deferred months increased by 2 to 8 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at an 11.98 cent premium to the spot price, from a premium of 15.13 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates higher demand expectations and lower supplies with respect to demand. Demand includes speculative demand 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 April 10th, the spot month gasoline futures price increased by 4.60 cents per gallon (+2.61%) while the deferred months increased from 3 to 6 cents per gallon making the forward pricing curve higher and relatively steady in slope. The one year forward price ended the week at a 3.85 cent premium to the spot price, from a discount of 3.98 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and steady inventory levels with respect to supply and demand.
The US dollar increased on the week which is negative for price. Inventories on the week were higher which is negative for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was higher on the week which is positive for price. US domestic crude production was higher on the week which is negative for price. Domestic production is up 14.27% year over year.
The attractiveness of making new hedges decreased due to higher prices and higher levels of speculation. On a flat-price basis, prices remain very attractive when compared to the last four years and are near the middle of where prices have been over the past four months. The market has found a price range. Production is expected to continue to outstrip demand and inventories will continue to grow toward the second half of 2015. Speculation was higher giving the hedger more competition with speculators for long positions. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging may become more attractive.
Weekly US petroleum demand decreased by 1.81% during the week ending April 3rd. Domestic demand is up 4.47% vs. one-year ago and demand is currently 3.60% over the five year average.
Domestic production increased slightly on the week. The number of operating oil drilling rigs in the US continues to decline. During the week, the number of operating rigs in the US declined by 42 or 5.24%. The previous week's decline was 11 rigs. This will limit production growth and may cause sustained declines in production which would help in balancing supply and demand in the market which would support price. The market has been watching this metric very closely and the sharp downturn in the number of operating rigs has contributed to the recent price increase. While this is true, production continues to increase and inventories continue to grow. The market is taking the steps to balance the supply and demand yet increasing production and growing inventories will keep prices low. As the rate of change in production and inventory growth decreases, the market will take this as a signal to buy and prices will firm up.
Below is the one-year chart of spot diesel futures prices as of April 10th.
Below is the one-year chart of spot gasoline futures prices as of April 10th.
: : Inventories increasing by 11.52 million barrels while inventories were expected to increase by 2.09 million barrels on the week. The five-year average inventory decreased by 2.96 million barrels. Inventories increased vs. the five year average and decreased vs. expectations. This was the first decrease vs. expectations in two months.
: : The market continues to be oversupplied and continues to work to correct this situation. The process of balancing supply is seen in lower rig count in the US and higher global demand expectations due to lower price. While these things have begun, US Domestic production is expected to continue to grow but perhaps at a slower pace, and inventories continue to become larger albeit at a slower pace. Any significant increase in price would cause a resumption of production growth and would curtail any growth in demand.
: : Speculation spiked and had the largest one week increase since July 2013. This was the largest percent increase in speculation since October 2010. This is supportive of price.
: : Prices were supported as Saudi Arabia announced that it is raising prices for crude oil shipments to its Asian customers by 30 cents. Beside the fact that this is higher price, it indicates that demand may be stronger due to low price in Asia. This is directly positive for price and also indicates stronger demand which is also positive for price.
: : There is doubt that the Iranian nuclear deal will be completed. If it is not completed, Iranian oil will not be openly for sale on the global market. This will decrease available supply and be supportive of price.
: : Stock market increasing by +1.70% on the week is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +2.89% 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.
Below is the one-year chart US stock market prices as of April 10th.
Below is the one-year chart for the US dollar index as of April 10th.
During the week ended April 3rd, total petroleum inventories increased by 11.52 million barrels vs. a five year average decrease of 2.96 million barrels and vs. an expected increase of 2.09 million barrels. Inventories increased by 14.48 million barrels vs. the five year average. Total inventories stand at 839.3 million barrels, up from 827.7 million barrels at the end of the previous week. The five year average inventory is 717.7 million barrels, down from 720.6 million barrels at the end of the previous week.
Current inventories are 16.94% higher than the five year average, up from +14.86% at the end of the previous week. Inventory levels are growing due to excess supply and low price where those who hold inventories are accumulating more which is essentially increasing a speculative long position in the market. Those who hold inventories have an incentive to do so since forward prices are higher than spot prices, holders of inventory can earn an attractive guaranteed return on their investment.
As of April 7th, the net speculative long position in petroleum futures was 205,834,000 barrels up 44,265,000 barrels (+27.40%) from the previous week. The increase was 51.70% in the last two weeks. Speculation increased for the second week in a row and represents 24.53% of domestic inventories. Speculation is 21.67% below its one year moving average. The corresponding spot month diesel futures price on April 7th was 178.38 cents per gallon, up 6.59 cents from 171.79 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 61.85% correlated over the past 52 weeks indicating that, on a statistical basis over the past year 38.26% of the price movement of diesel fuel is explained by changes in levels of speculation. 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 diesel futures price would be 165.10 cents per gallon or 13.28 cents per gallon less than current prices. The analysis would indicate that about 7.44% of current price is attributable to speculation and its underlying market rationale. This "would be" price was about 2 cents lower on the week.
The net speculative long position has been variable over the past year ranging between 135 million and 453 million barrels with an average of about 263 million barrels, which is down about 4 million barrels on the week.
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.