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Prices Mostly Higher - Rig Count Higher - Speculation Down - Production Higher - Stock Market Higher - Inventory Higher - Dollar Lower
During the week ending May 3rd, the spot month diesel futures price increased by 1.80 cents per gallon (+0.88%) while the deferred months changed by -2 to +2 cents per gallon making the forward pricing curve relatively unchanged in level and negatively sloped. The one year forward price ended the week at a 2.17 cent discount to the spot price, from a premium of 0.17 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates steady demand expectations and lower inventories with respect to demand. Demand also includes speculation which was lower 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 May 3rd, the spot month gasoline futures price decreased by 1.98 cents per gallon (-0.97%) while the deferred months decreased by 2 to 3 cents per gallon making the forward pricing curve lower and more negatively sloped. The one year forward price ended the week at a 13.35 cent discount to the spot price, from a discount of 12.98 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates lower demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was lower on the week.
Weekly US petroleum demand decreased by 1.45% during the week ending April 26th. Domestic demand is up by 0.50% vs. one-year ago and demand is currently 2.75% above the five year average.
Domestic production increased 100,000 barrels per day for the week ending April 26th to a new all-time high of 12.3 million barrels per day. Domestic production is 15.83% above year ago levels. The number of operating oil drilling rigs in the US increased by 2 from 805 to 807 on the week. Currently, this are 491 more than the low of 316 rigs in 2016 and 49.84% lower than the peak of 1609 in October 2014. 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 3,872,000 barrels per day (+45.94%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of May 3rd.
Below is the one-year chart of spot gasoline futures prices as of May 3rd.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories surged on the week by 9.54 million barrels while inventories were expected to decrease by 0.03 million barrels on the week. The five-year average inventory increased by 0.33 million barrels. Inventories increased vs. expectations and vs. five year average.
: : The President announced an increase in tariffs on Chinese goods entering the US from 10% to 25% effective on May 10th in response to negative news coming from the negotiations. This move is negative for global economic growth expectations, petroleum demand growth expectations, and price.
: : Economic news from China shows softness in their economy. This is negative for Chinese GDP expectations and petroleum demand expectations in the world’s second largest petroleum producer.
: : Russia did not make its production cut goals in April producing more than they agreed to produce. This is an increase in supply and is negative for price.
: : The Stock market increased by +0.20% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.50% 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.
OPEC Production Five Year History – Up 25,000 barrels per day in April ending the four month slide in OPEC production. This low level of OPEC production continues to be supportive of price. OPEC production remaining near the four year low cedes market share to US shale producers.
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 May 3rd.
Below is the one-year chart for the US dollar index as of May 3rd.
During the week ended April 26th, total petroleum inventories increased by 9.54 million barrels vs. a five year average increase of 3.28 million barrels and vs. an expected increase of 0.03 million barrels. Inventories increased by 9.22 million barrels vs. the five year average and increased by 9.52 million barrels vs. expectations. Total inventories stand at 823.0 million barrels, up from 813.5 million barrels at the end of the previous week. The five year average inventory is 825.8 million barrels, up from 825.4 million barrels at the end of the previous week.
Current inventories are -0.33% versus the five year average, an increase on the week.
As of April 30th, the net speculative long position in petroleum futures was 418,562,000 barrels, down 12,017,000 barrels (-2.79%) from the previous week. Speculation decreased for the first time in ten weeks and represents 50.86% of domestic inventories. Speculation is 12.85% above its one year moving average. The corresponding spot month diesel futures price on April 30th was 208.12 cents per gallon, down 3.68 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 76.43% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 58.42% 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 371 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.