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Speculation Up - Prices Up - Rig Count Up - Inventory Down - Production Up
During the week ending April 14th, the spot month diesel futures price increased by 2.11 cents per gallon (+1.30%) while the deferred months increased by 2 to 3 cents per gallon making the forward pricing curve higher and relatively unchanged in slope. The one year forward price ended the week at a 6.06 cent premium to the spot price, from a premium of 5.19 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher demand expectations and steady inventories with respect to demand. Demand includes speculative demand which increased 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 14th, the spot month gasoline futures price decreased by 1.13 cents per gallon (-0.65%) while the deferred months increased by 0 to 3 cents per gallon making the forward pricing curve generally higher and positively sloped. The one year forward price ended the week at a 2.30 cent premium to the spot price, from a discount of 1.65 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates generally higher demand expectations and higher inventory levels with respect to supply and demand. Demand includes speculative demand which was higher on the week.
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 which negative for price. Domestic production is now positive year over year and is up 2.87% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was up on the week which is negative for price.
Weekly US petroleum demand increased by 0.89% during the week ending April 7th. Domestic demand is unchanged vs. one-year ago and demand is currently 4.23% above the five year average.
Domestic production increased for the 8th week and is 2.87% above year ago levels. The number of operating oil drilling rigs in the US increased by 11 and stands at 683. This is 367 more than the recent low of 316 and 57.55% lower than the peak of 1609 in October 2014. The increasing rig count is causing US production to stabilize and grow as the global rebalancing of supply and demand continues. US domestic production has increased by 807,000 barrels per day (+9.58%) since the recent low on July 1, 2016 and has decreased by 375,000 barrels per day (-3.90%) since the peak of 9.61 million barrels per day in June 2015.
Below is the one-year chart of spot diesel futures prices as of April 14th.
Below is the one-year chart of spot gasoline futures prices as of April 14th.
MARKET FACTORS & COMMENTARY:
: : Inventories decreased by 7.29 million barrels while inventories were expected to decrease by 2.93 million barrels on the week. The five-year average inventory increased by 2.10 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : International Energy Agency reports that global inventories expanded in the first quarter of 2017 despite OPEC cuts in production. This imbalance is expected to be corrected in the second quarter. This is negative for price as OPEC cuts did not immediately balance the market.
: : OPEC has indicated that compliance for production cuts from its member countries has been better than expected. This causes supplies to be lower than would be expected if lower compliance were observed. This is positive for price.
: : The Stock market decreased by -1.13% which is negative for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -0.66% on the week 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.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of April 2017. Supply and demand are in the process of re-balancing which is the main cause of steady to higher price levels over the past 6 months. This forecast shows a relatively balanced market in 2017 which generally indicates firmer and volatile prices moving forward. The forecast also indicates that a surplus is forecasted for the first half of 2018. This period of balance and surplus will mitigate any upward price movements.
Below is the one-year chart US stock market prices as of April 14th.
Below is the one-year chart for the US dollar index as of April 14th.
During the week ended April 7th, total petroleum inventories decreased by 7.29 million barrels vs. a five year average increase of 2.10 million barrels and vs. an expected decrease of 2.93 million barrels. Inventories decreased by 9.39 million barrels vs. the five year average and decreased by 4.36 million barrels vs. expectations. Total inventories stand at 919.7 million barrels, down from 927.0 million barrels at the end of the previous week. The five year average inventory is 756.5 million barrels, up from 754.4 million barrels at the end of the previous week.
Current inventories are 21.57% higher than the five year average, down from +22.88% at the end of the previous week.
As of April 11th, the net speculative long position in petroleum futures was 373,349,000 barrels, up 57,771,000 barrels (+18.31%) from the previous week. Speculation increased for the second week and represents 40.59% of domestic inventories. Speculation is 28.17% above its one year moving average. The corresponding spot month diesel futures price on April 11th was 165.06 cents per gallon, up 5.83 cents from 159.23 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 82.25% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 67.66% of diesel fuel price movements are explained by changes in level of speculation.
The net speculative long position has been variable over the past year ranging between 89 million and 488 million barrels with an average of about 291 million barrels, which is up about 3 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 April 11th, the market price for spot month diesel futures is estimated to be 139.56 versus the actual price of 165.06. This indicates that the market is currently overvalued by 25.49 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.