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Prices Higher - Inventory Higher - Speculation Higher - Again
During the week ending May 17th, the spot month heating oil futures price increased by 3.08 cents per gallon (+1.06%) while the deferred months increased by roughly 3 cents per gallon making the forward pricing curve higher and nearly unchanged in slope. The one year forward price ended the week at a 1.66 cent (0.57%) discount to the spot price, from a discount of 1.83 cents (0.63%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates higher demand expectations and steady supplies with respect to demand. Demand includes speculative demand which increased on the week and can be volatile. 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 17th, the spot month gasoline futures price increased by 4.66 cents per gallon (+1.63%) while the deferred months increased by 0 to 5 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 12.54 cent (4.51%) discount to the spot price, from a discount of 9.37 cents (3.39%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand.
The US dollar was higher on the week which is negative for price. Inventories on the week were higher than expectations and remain above historical averages. This is negative for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was higher on the week which is positive of price. US domestic crude production continues to be strong and decreased on the week which is positive for price. Geopolitical risk continues to be a background factor that is supportive of price.
Weekly US petroleum demand decreased by 3.06% during the week ending May 10th. Demand is down by 1.01% vs. one year ago and demand is currently 2.71% below the five year average.
The attractiveness of making new hedges decreased slightly on the week given the higher price environment and slightly higher levels of speculation. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive. Entering new, longer-term hedges at these levels would involve relatively low levels of competition with speculators for long futures positions. Diesel futures prices in the $2.80 - $2.90 have made hedging more advantageous depending on the goals of hedger.
Below is a one year chart of spot diesel futures prices as of May 17th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of May 17th.
Factors affecting the market on the period were:
During the week ended May 10th, total petroleum inventories increased by 4.26 million barrels vs. a five year average decrease of 1.95 million barrels and vs. an expected increase of 0.30 million barrels. Inventories increased by 6.22 million barrels vs. the five year average. Total inventories stand at 732.4 million barrels, up from 728.2 million barrels at the end of the previous week. The five year average inventory is 705.2 million barrels, down from 707.2 million barrels at the end of the previous week.
Current inventories are 3.86% larger than the five year average up from +2.97% at the end of the previous week. Inventories versus the five year average on a percentage basis remain positive. This helps to mitigate the effects of supply disruption and decreases price volatility.
As of May 14th, the net speculative long position in petroleum futures was 228,384,000 barrels up 1,716,000 barrels (+0.76%) from the previous week. The level of speculation increased for the third week and represents 31.18% of domestic inventories. Speculation is 7.51% below its one year moving average and is 36.53% below the 52 week high level. Speculative levels are near the 25th percentile of the past year's range. The corresponding spot month heating oil futures price on May 14th was 293.70 cents per gallon, up 0.93 cents from 292.77 cents per gallon during the previous week.
Heating oil price and size of speculative net long position in petroleum are 78.66% correlated over the past 52 weeks (a slight decrease on the week) indicating that, on a statistical basis over the past year 61.88% of the price movement of heating oil is explained by changes in levels of speculation. This statistical relationship has become weaker over the past several months but remains significant. A linear regression analysis over the past 52 weeks shows that if speculation were zero and the market forces causing speculation evaporated, that the spot month heating oil futures price would be 233.38 cents per gallon or 60.32 cents per gallon less than current prices. The analysis would indicate that about 20.54% of current price is attributable to speculation and its underlying market rationale. The "would be" price was virtually unchanged on the week.
The net speculative long position has been variable over the past year ranging between 171 million and 360 million barrels with an average of about 247 million barrels, which was roughly unchanged on the week.
The graph below is three year history of speculative position levels.
Linwood Capital, LLC is an institutional fuel hedging management and consulting firm. Linwood creates and manages customized fuel hedging programs primarily for public clients on a nationwide basis.