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Prices Higher - Inventory Lower - Speculation Higher - Record Production
During the week ending April 11th, the spot month diesel futures price increased by 2.53 cents per gallon (+0.87%) while the deferred months changed by -1 to +3 cents making the forward pricing curve mostly higher and more negatively sloped. The one year forward price ended the week at a 7.45 cent (2.54%) discount to the spot price, from a discount of 6.60 cents (2.27%) and the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates steady demand expectations and lower supplies with respect to demand. Demand includes speculative demand. 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.
Below is a one week chart of the diesel forward pricing curve as of April 11th.
During the week ending April 11th, the spot month gasoline futures price increased by 8.31 cents per gallon (+2.83%) while the deferred months increased by 1 to 7 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 24.86 cent (8.99%) discount to the spot price, from a discount of 19.05 cents (6.95%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand.
Below is a one week chart of the gasoline forward pricing curve as of April 11th.
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 higher on the week which is positive for price. US domestic crude production was higher on the week which is negative for price.
Below are charts of three year crude production and avg. vs. five year demand as of April 4th.
Weekly US petroleum demand increased by 0.49% during the week ending April 4th. Demand is down 0.27% vs. one-year ago and demand is currently 2.31% below the five year average.
The attractiveness of making new hedges decreased on the week as prices and speculation were both higher. Higher speculation causes hedging to be less attractive since it would involve more competition with speculators for long positions which is disadvantageous for the long-hedger. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive.
Below are the one year charts of spot diesel and spot gasoline futures prices as of April 11th.
: : Inventories decreasing by 0.92 million barrels while inventories were expected to increase by 0.40 million barrels on the week. The five year average inventory decreased by 2.07 million barrels. Inventories decreased vs. expectations and increased vs. the five year average.
: : Remaining tensions in Ukraine which sustain the level of the geopolitical risk of petroleum supply disruption which is supportive of price.
: : Domestic petroleum production to a new 26 year high. This increase in domestic production increases global excess capacity and increases the supply of oil that is not subject to geopolitical risk. These two factors have a mitigating effect on upward price movement.
: : Global economic factors including:
: : US domestic economic factors including:
: : The US Stock market decreasing by 2.65% on the week which is negative for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by 1.21% 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.
During the week ended April 4th, total petroleum inventories decreased by 0.92 million barrels vs. a five year average decrease of 2.07 million barrels and vs. an expected increase of 0.40 million barrels. Inventories increased by 1.15 million barrels vs. the five year average. Total inventories stand at 707.8 million barrels, down from 708.7 million barrels at the end of the previous week. The five year average inventory is 720.7 million barrels, down from 722.8 million barrels at the end of the previous week.
Current inventories are 1.80% smaller than the five year average up from -1.95% at the end of the previous week. Inventories versus the five year average on a percentage basis has been steady and continues to be negative. The five year average inventory has grown over the past five years and it has become increasingly difficult for current inventories to surpass the five year average. Current inventories will be closer to the five year average and not as high compared to it. Also, increased production in the U.S. over the past three years diminishes the need for larger inventories since production is geographically closer to consumption and the risk of disruption and disruption due to geopolitical events is lower.
Below is a one year chart of average petroleum inventory as of April 4th.
As of April 8th, the net speculative long position in petroleum futures was 403,717,000 barrels up 22,226,000 barrels (+5.83%) from the previous week. Speculation increased for the second week in a row and represents 57.04% of domestic inventories. Speculation is 24.88% above its one year moving average and is 9.79% below the 52-week high set on March 4th. The corresponding spot month diesel futures price on April 8th was 293.44 cents per gallon, up 4.66 cents from 288.78 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 67.88% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 46.09% 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 270.04 cents per gallon or 23.39 cents per gallon less than current prices. The analysis would indicate that about 7.97% 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 203 million and 448 million barrels with an average of about 323 million barrels, which up about 2 million barrels on the week.
The graph below is three year history of speculative position levels as of April 8th.
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, natural gas, and electricity on a nationwide basis.