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Prices Mixed - Rig Count Lower - Speculation Up - Production Higher - Stock Market Higher - Inventory Higher - Dollar Higher
During the week ending April 26th, the spot month diesel futures price decreased by 1.97 cents per gallon (-0.95%) while the deferred months decreased by 2 to 4 cents per gallon making the forward pricing curve lower and less positively sloped. The one year forward price ended the week at a 1.05 cent premium to the spot price, from a premium of 1.51 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and higher 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 26th, the spot month gasoline futures price increased by 2.84 cents per gallon (+1.37%) while the deferred months varied by -2 to +2 cents per gallon making the forward pricing curve generally steady and more negatively sloped. The one year forward price ended the week at a 17.91 cent discount to the spot price, from a discount of 15.15 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 2.79% during the week ending April 19th. Domestic demand is down by 0.99% vs. one-year ago and demand is currently 5.54% above the five year average.
Domestic production increased 100,000 barrels per day for the week ending April 19th and has returned to its all-time high level of 12.2 million barrels per day. Domestic production is 15.25% above year ago levels. The number of operating oil drilling rigs in the US decreased by 20 from 825 to 805 on the week. Currently, this are 489 more than the low of 316 rigs in 2016 and 49.97% lower than the peak of 1609 in October 2014. This is a new one-year low rig count. 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 26th.
Below is the one-year chart of spot gasoline futures prices as of April 26th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 2.69 million barrels while inventories were expected to decrease by 1.78 million barrels on the week. The five-year average inventory increased by 2.69 million barrels. Inventories increased vs. expectations and decreased vs. five year average.
: : 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 1-1.5 million barrels per day, the approximate volume of crude being purchased under the waivers. This supply will need to come from other sources. Saudi Arabia, United States, and Russia are likely candidates.
: : The Stock market increased by +1.20% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.64% 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 26th.
Below is the one-year chart for the US dollar index as of April 26th.
During the week ended April 19th, total petroleum inventories increased by 2.69 million barrels vs. a five year average increase of 2.69 million barrels and vs. an expected decrease of -1.78 million barrels. Inventories decreased by 0.001 million barrels vs. the five year average and increased by 4.47 million barrels vs. expectations. Total inventories stand at 813.5 million barrels, up from 810.8 million barrels at the end of the previous week. The five year average inventory is 825.4 million barrels, up from 822.8 million barrels at the end of the previous week.
Current inventories are -1.45% versus the five year average, unchanged on the week.
As of April 23rd, the net speculative long position in petroleum futures was 430,579,000 barrels, up 8,407,000 barrels (+1.99%) from the previous week. Speculation increased for the ninth week and represents 52.93% of domestic inventories. Speculation is 15.00% above its one year moving average. The corresponding spot month diesel futures price on April 23rd was 211.80 cents per gallon, up 3.58 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 75.15% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 56.47% 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 374 million barrels, which is down 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.