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Prices Lower - Rig Count Lower - Speculation Lower - Production Higher - Stock Market Lower - Inventory Higher - Dollar Lower
During the week ending May 24th, the spot month diesel futures price decreased by 12.42 cents per gallon (-5.93%) while the deferred months decreased by 5-13 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 1.81 cent discount to the spot price, from a discount of 4.47 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 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 24th, the spot month gasoline futures price decreased by 11.28 cents per gallon (-5.51%) while the deferred months decreased by 7 to 11 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at an 11.88 cent discount to the spot price, from a discount of 14.46 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 0.94% during the week ending May 17th. Domestic demand is down by 2.68% vs. one-year ago and demand is currently 1.67% below the five year average.
Domestic production increased 100,000 barrels per day for the week ending May 17th to 12.2 million barrels per day. Domestic production is 13.75% above year ago levels. The number of operating oil drilling rigs in the US decreased by 5 from 802 to 797 on the week, a new 13 month low. Currently, this are 481 more than the low of 316 rigs in 2016 and 50.47% 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 3,772,000 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 24th.
Below is the one-year chart of spot gasoline futures prices as of May 24th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 9.22 million barrels while inventories were expected to decrease by 2.11 million barrels on the week. The five-year average inventory decreased by 1.56 million barrels. Inventories increased vs. expectations and vs. the five year average.
: : Increasing trade tensions with the Chinese and the prospects of lower demand contributed to lower prices on the week. The trade dispute and tariffs will dampen global economic growth and petroleum demand growth which is negative for price.
: : Speculators continued to run for the sidelines for the fourth week in a row due to a static supply outlook and negative demand outlook. Speculator selling is negative pressure on price.
: : On the supply side, OPEC + Friends have decided to continue to curtail supply at least through the end of 2019. This is supportive of price but may cause higher production among non-OPEC producers ultimately adding to supply anyway. The Russians may increase supply in order to support their flagging domestic economy. This would be positive for supply and negative for price.
: : US inventory rose significantly for the second week and production continues to be strong. This is indicating that there is going to be ample supply in what could perhaps be a falling demand environment which is negative for price.
: : The Stock market decreased by -1.17% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.39% 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 24th.
Below is the one-year chart for the US dollar index as of May 24th.
During the week ended May 17th, total petroleum inventories increased by 9.22 million barrels vs. a five year average decrease of 1.56 million barrels and vs. an expected decrease of 2.11 million barrels. Inventories increased by 10.78 million barrels vs. the five year average and increased by 11.33 million barrels vs. expectations. Total inventories stand at 831.9 million barrels, up from 822.7 million barrels at the end of the previous week. The five year average inventory is 814.0 million barrels, down from 815.6 million barrels at the end of the previous week.
Current inventories are +2.20% versus the five year average, an increase on the week and the highest level since first time in excess of the FYA since February 15th.
As of May 21st, the net speculative long position in petroleum futures was 343,451,000 barrels, down 21,988,000 barrels (-6.02%) from the previous week. Speculation decreased for the fourth week and represents 41.28% of domestic inventories. Speculation is 3.89% below its one year moving average. The corresponding spot month diesel futures price on May 21st was 207.94 cents per gallon, up 2.05 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 75.64% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 57.21% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation decreased slightly from the previous week continuing a trend of decreasing for the past several weeks. This is due in part to the decreases in level of speculation during the past four weeks.
The net speculative long position has been variable over the past year ranging between 134 million and 583 million barrels with an average of about 357 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.