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Prices Lower - Rig Count Lower - Speculation Lower - Production Lower - Stock Market Lower - Inventory Lower - Dollar Lower
During the week ending May 10th, the spot month diesel futures price decreased by 1.98 cents per gallon (-0.96%) while the deferred months decreased by 1-2 cents per gallon making the forward pricing curve lower and virtually unchanged in slope. The one year forward price ended the week at a 1.93 cent discount to the spot price, from a discount of 2.17 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and steady 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 10th, the spot month gasoline futures price decreased by 3.74 cents per gallon (-1.85%) while the deferred months decreased by 1 to 4 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at an 11.06 cent discount to the spot price, from a discount of 13.35 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was lower on the week.
Weekly US petroleum demand increased by 1.27% during the week ending May 3rd. Domestic demand is down by 0.30% vs. one-year ago and demand is currently 3.10% above the five year average.
Domestic production decreased 100,000 barrels per day for the week ending May 3rd. Domestic production is 13.99% above year ago levels. The number of operating oil drilling rigs in the US decreased by 2 from 807 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. The recent decline in US rig count is due to 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 May 10th.
Below is the one-year chart of spot gasoline futures prices as of May 10th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories decreased on the week by 4.72 million barrels while inventories were expected to decrease by 1.15 million barrels on the week. The five-year average inventory decreased by 5.68 million barrels. Inventories decreased vs. expectations and increased vs. five year average.
: : Prices decreased on the week largely in response to the imposition of new tariffs for Chinese goods coming to the United States. These tariffs will slow the economies of the world’s two largest petroleum consuming countries. This is negative for demand expectations and price.
: : Saudi Arabia indicated that they will make up any supply shortfalls due to Iranian sanctions. This will neutralize any shortness in supply and will be neutral for price but negative for speculation which is negative for price.
: : Geopolitical tensions regarding Venezuela, Iran, and Libya re being overshadowed by the trade dispute between the US and China and how demand will be affected.
: : The Stock market decreased by -2.18% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.19% 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 May 2019. The chart shows the expectation of a roughly balanced market through 2020. This forecast indicates lower supply over the next 18 months when compared to the April forecast. This change in forecast is mostly due to the end of waivers for Iranian sanctions which was somewhat unexpected a month ago. Lower supply vs. demand is positive for price.
Below is the one-year chart of the US stock market as of May 10th.
Below is the one-year chart for the US dollar index as of May 10th.
During the week ended May 3rd, total petroleum inventories decreased by 4.72 million barrels vs. a five year average decrease of 5.68 million barrels and vs. an expected decrease of 1.15 million barrels. Inventories increased by 0.97 million barrels vs. the five year average and decreased by 3.57 million barrels vs. expectations. Total inventories stand at 818.3 million barrels, down from 823.0 million barrels at the end of the previous week. The five year average inventory is 820.1 million barrels, down from 825.8 million barrels at the end of the previous week.
Current inventories are -0.22% versus the five year average, an increase on the week.
As of May 7th, the net speculative long position in petroleum futures was 271,912,000 barrels, down 39,085,000 barrels (-9.34%) from the previous week. Speculation decreased for the second week and represents 46.37% of domestic inventories. Speculation is 3.50% above its one year moving average. The corresponding spot month diesel futures price on May 7th was 205.04 cents per gallon, down 3.08 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 76.98% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 59.25% 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 367 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.