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Prices Higher - Rig Count Lower - Speculation Lower - Production Lower - Stock Market Lower - Inventory Higher - Dollar Higher
The level and slope of the diesel forward pricing curve indicates higher 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.
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 17th, the spot month gasoline futures price increased by 5.82 cents per gallon (+2.93%) while the deferred months increased by 1 to 7 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 14.46 cent discount to the spot price, from a discount of 11.06 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 lower on the week.
Weekly US petroleum demand decreased by 4.56% during the week ending May 10th. Domestic demand is up by 0.31% vs. one-year ago and demand is currently 0.54% above the five year average.
Domestic production decreased 100,000 barrels per day for the week ending May 10th to 12.1 million barrels per day. Domestic production is 12.84% above year ago levels, the lowest year over year increase since January 2018. The number of operating oil drilling rigs in the US decreased by 3 from 805 to 802 on the week, a new 13 month low. Currently, this are 486 more than the low of 316 rigs in 2016 and 50.16% 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. The growth in the number of drilled uncompleted wells (DUCS) has been flat to negative in 2019. This indicates that producers are putting more oil on the market and bringing more wells on-line. Currently, drilling activity has not kept up with the number of producing wells since the number of DUC’s has been declining slightly.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 May 17th.
Below is the one-year chart of spot gasoline futures prices as of May 17th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 4.39 million barrels while inventories were expected to decrease by 1.02 million barrels on the week. The five-year average inventory decreased by 4.52 million barrels. Inventories decreased vs. expectations and increased vs. five year average.
: : Saudi Arabia reported drone attacks on oil pumping stations which increased geopolitical risks to supply since Iran was assumed to be behind the attacks. Escalation of tensions increases the likelihood that there would be disruption from the Persian Gulf region. Positive for price.
: : The International Energy Agency (IEA) is forecasting lower than expected global petroleum demand due to lackluster economic performance in Asia but this negative factor for price is offset by the IEA’s other prediction that global supply will tighten with the drop in Iranian exports due to US sanctions.
: : OPEC + Friends ministers met over the weekend and decided to keep the production cuts that have been in place since December. This is supportive of price and negative for supply expectations. This tightness in supply is offset by expected weak petroleum demand growth due mainly to lower economic growth expectation because of the US/China trade dispute.
: : The Stock market decreased by -0.76% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.68% 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 – 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 17th.
Below is the one-year chart for the US dollar index as of May 17th.
During the week ended May 10th, total petroleum inventories increased by 4.39 million barrels vs. a five year average decrease of 4.52 million barrels and vs. an expected decrease of 1.02 million barrels. Inventories increased by 8.91 million barrels vs. the five year average and increased by 5.42 million barrels vs. expectations. Total inventories stand at 822.7 million barrels, up from 818.3 million barrels at the end of the previous week. The five year average inventory is 815.6 million barrels, down from 820.1 million barrels at the end of the previous week.
Current inventories are +0.87% versus the five year average, an increase on the week and the first time in excess of the FYA since March 8th.
As of May 14th, the net speculative long position in petroleum futures was 365,439,000 barrels, down 14,038,000 barrels (-3.70%) from the previous week. Speculation decreased for the third week and represents 44.42% of domestic inventories. Speculation is 0.89% above its one year moving average. The corresponding spot month diesel futures price on May 14th was 205.89 cents per gallon, up 0.85 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 76.49% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 58.50% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation decreased slightly from the previous week breaking a trend of increasing for many months. This is due in part to the decreases in speculation during the past three weeks.
The net speculative long position has been variable over the past year ranging between 134 million and 597 million barrels with an average of about 362 million barrels, which is down 5 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.