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Prices Steady - Rig Count Lower - Speculation Up - Production Lower - Stock Market Lower - Inventory Lower - Dollar Higher
Waivers on Iranian Sanctions not Extended – Prices Up
During the week ending April 19th, the spot month diesel futures price increased by 0.02 cents per gallon (+0.01%) while the deferred months increased by 0 to 1 cents per gallon making the forward pricing curve steady in level and slope. The one year forward price ended the week at a 1.51 cent premium to the spot price, from a premium of 1.01 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates steady demand expectations and steady 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 19th, the spot month gasoline futures price increased by 3.52 cents per gallon (+1.73%) while the deferred months increased by 0 to 2 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 15.15 cent discount to the spot price, from a discount of 12.24 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 decreased by 2.08% during the week ending April 12th. Domestic demand is down by 3.65% vs. one-year ago and demand is currently 2.19% above the five year average.
Domestic production decreased 100,000 barrels per day for the week ending April 12th and is 12.1 million barrels per day. Domestic production is 14.80% above year ago levels. The number of operating oil drilling rigs in the US decreased by 8 from 833 to 825 on the week. Currently, this are 509 more than the low of 316 rigs in 2016 and 48.73% 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 3,672,000 barrels per day (+43.57%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of April 19th.
Below is the one-year chart of spot gasoline futures prices as of April 19th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories decreased on the week by 2.93 million barrels while inventories were expected to decrease by 1.33 million barrels on the week. The five-year average inventory decreased by 0.55 million barrels. Inventories decreased vs. expectations and decreased vs. five year average.
: : Prices increased Monday on news that the US will not extend the waivers to purchase Iranian oil granted to eight countries. The goal of the US sanctions on Iran is now Iranian exports at zero. This action may decrease Iranian production from its current level of 2.71 million barrels per day by 1to 1.5 million barrels per day, the approximate volume of crude being purchased under the waivers. Saudi Arabia and others have indicated that they will make up for any decreases in Iranian supply. Saudi Arabia currently has an estimated 1.68 million barrel per day in excess capacity. Russia also has excess capacity. Clearly this was positive price as Iran threatened to close the Strait of Hormuz which would shut off all oil from the region. This threat is also supportive of price. How all of this will impact price hinges on the ability of Saudi Arabia and other oil producers to make up the shortfall. This decision also puts focus on the viability of the OPEC + Friends output curbs that went into effect because of the waivers granted in November.
: : Venezuela and Libya continue to have lower than capacity production due to political situations and unrest.
: : Demand moving forward is uncertain. China’s economy reported better than expected economic indications on the week which is supportive of demand, demand expectations, and price where the opposite occurred in Europe where economic indicators on the week were lower than expected.
: : The Stock market decreased by -0.08% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.42% 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 19th.
Below is the one-year chart for the US dollar index as of April 19th.
During the week ended April 12th, total petroleum inventories decreased by 2.93 million barrels vs. a five year average decrease of -0.55 million barrels and vs. an expected decrease of -1.33 million barrels. Inventories decreased by 2.38 million barrels vs. the five year average and decreased by 1.60 million barrels vs. expectations. Total inventories stand at 810.8 million barrels, down from 813.7 million barrels at the end of the previous week. The five year average inventory is 822.8 million barrels, down from 823.3 million barrels at the end of the previous week.
Current inventories are -1.45% versus the five year average, down from -1.16% at the end of the previous week to the lowest level vs. the FYA since August 2018. These lower inventories are the result of production cuts from OPEC and other producers in order to prop up price.
As of April 16th, the net speculative long position in petroleum futures was 422,172,000 barrels, up 40,718,000 barrels (+10.67%) from the previous week. Speculation increased for the eighth week and represents 52.07% of domestic inventories. Speculation is 11.70% above its one year moving average. The corresponding spot month diesel futures price on April 16th was 208.22 cents per gallon, up 3.73 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 74.18% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 55.03% 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 378 million barrels, which is down 3 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.