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Prices Higher - Rig Count - Higher - Speculation Up - OPEC Production Lower - Stock Market Higher - Inventory Lower - Dollar Lower
During the week ending April 12th, the spot month diesel futures price increased by 2.83 cents per gallon (+1.39%) while the deferred months increased by 1 to 3 cents per gallon making the forward pricing curve higher and steady in slope. The one year forward price ended the week at a 1.01 cent premium to the spot price, from a premium of 1.24 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher 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 April 12th, the spot month gasoline futures price increased by 6.83 cents per gallon (+3.47%) while the deferred months increased by 3 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 12.24 cent discount to the spot price, from a discount of 9.07 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.
Weekly US petroleum demand increased by 1.59% during the week ending April 12th. Domestic demand is down by 0.83% vs. one-year ago and demand is currently 5.62% above the five year average.
Domestic production remained unchanged for the week ending April 5th at 12.2 million barrels per day. Domestic production is 15.91% above year ago levels. The number of operating oil drilling rigs in the US increased by 8 from 831 to 833 on the week. Currently, this are 517 more than the low of 316 rigs in 2016 and 48.23% 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 3,772,000 barrels per day (+44.76%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of April 12th.
Below is the one-year chart of spot gasoline futures prices as of April 12th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories decreased on the week by 0.80 million barrels while inventories were expected to decrease by 0.88 million barrels on the week. The five-year average inventory increased by 1.63 million barrels. Inventories increased vs. expectations and decreased vs. five year average.
: : Prices continue higher as OPEC + Friends continue to curtail supply in order to shrink inventories and shore up prices. Upward price movement is limited by the increasingly negative outlook for the global economy and global economic growth rate. Global growth rate risk is to the downside.
: : Prices spiked mid-week as a militant group in Libya was causing chaos which may cause supply disruption. Geopolitical risk also was seen on the week in Iran where the US government declared an elite wing of the Iranian military as a terrorist organization. This signals a harder stance against Iran which may tighten the sanctions against Iranian oil exports which would further shrink global supply and be supportive for price.
: : The Stock market increased by +0.51% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.43% 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 April 2019. The chart shows the expectation of varying levels of surplus through 2020 and a slight deficit for Q1 2019. This forecast shows similar forecasted surpluses for 2019-2020 than the March forecast showed. The chart shows an actual deficit of around 500,000 barrels per day in the first quarter which is the main reason for the increase in price during the first quarter.
Below is the one-year chart of the US stock market as of April 12th.
Below is the one-year chart for the US dollar index as of April 12th.
During the week ended April 5th, total petroleum inventories decreased by 0.80 million barrels vs. a five year average increase of 1.63 million barrels and vs. an expected decrease of -0.88 million barrels. Inventories decreased by 2.43 million barrels vs. the five year average and increased by 0.08 million barrels vs. expectations. Total inventories stand at 813.7 million barrels, down from 814.5 million barrels at the end of the previous week. The five year average inventory is 823.3 million barrels, up from 821.7 million barrels at the end of the previous week.
Current inventories are -1.16% versus the five year average, down from -0.87% at the end of the previous week. Inventory with respect to the five year average declined from mid-January through mid-March and has been steady for the last several weeks. These lower inventories are the result of production cuts from OPEC and other producers in order to prop up price.
As of April 9th, the net speculative long position in petroleum futures was 381,484,000 barrels, up 43,762,000 barrels (+12.96%) from the previous week. Speculation increased for the seventh week and represents 46.88% of domestic inventories. Speculation is 0.01% above its one year moving average. The corresponding spot month diesel futures price on April 9th was 204.49 cents per gallon, up 3.60 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 72.44% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 52.47% of diesel fuel price movements are explained by changes in level of speculation. One-year correlation has continued to increase in the past weeks as the general level of speculation increases.
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 381 million barrels, which is down 4 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.