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Prices Lower - Inventory Lower - Speculation Higher
During the week ending May 30th, the spot month diesel futures price decreased by 7.03 cents per gallon (-2.38%) while the deferred months decreased by 2 to 7 cents making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 3.17 cent (1.10%) discount to the spot price, from a discount of 6.75 cents (2.28%) and the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates lower demand expectations and higher supplies with respect to demand. Demand includes speculative demand which was up 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.
Below is a one week chart of the diesel forward pricing curve as of May 30th.
During the week ending May 30th, the spot month gasoline futures price decreased by 2.70 cents per gallon (-0.89%) while the deferred months decreased by 2 to 4 cents per gallon making the forward pricing curve lower and roughly unchanged in slope. The one year forward price ended the week at a 23.57 cent (8.54%) discount to the spot price, from a discount of 23.39 cents (8.38%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and steady inventory levels with respect to supply and demand.
Below is a one week chart of the gasoline forward pricing curve as of May 30th.
The US dollar was lower on the week which is positive for price. Inventories on the week were lower which is positive 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 for price. US domestic crude production was higher to a new 27.5 year high which is negative for price.
Below are charts of three year crude production and avg. vs. five year demand as of May 23rd.
Weekly US petroleum demand increased by 3.75% during the week ending May 23rd. Demand is up 2.23% vs. one-year ago and demand is currently 1.82% above the five year average.
The attractiveness of making new hedges increased on the week as prices were lower but speculation was higher. Higher speculation levels on lower prices may indicate that prices will go yet lower when speculation levels normalize. High levels of speculation make new hedging relatively unattractive since new hedging should seek to involve a minimum amount of competition with speculators for long futures positions. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive.
Below are the one year charts of spot diesel and spot gasoline futures prices as of May 30th.
: : Inventories decreasing by 0.34 million barrels while inventories were expected to increase by 0.52 million barrels on the week. The five year average inventory increased by 1.53 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : Geopolitical risk is lower as the Pentagon reported that Russia has withdrawn the majority of its forces from the Ukrainian border thus decreasing the likelihood of conflict and possible disruption of petroleum supply.
: : US economic factors including:
: : The US Stock market increasing by 1.21% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by 0.03% 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.
During the week ended May 23rd, total petroleum inventories decreased by 0.34 million barrels vs. a five year average increase of 1.53 million barrels and vs. an expected increase of 0.52 million barrels. Inventories decreased by 1.88 million barrels vs. the five year average. Total inventories stand at 720.6 million barrels, down from 721.0 million barrels at the end of the previous week. The five year average inventory is 724.1 million barrels, up from 722.6 million barrels at the end of the previous week.
Current inventories are 0.49% smaller than the five year average down from -0.23% at the end of the previous week. For the second week in a row, inventories versus the five year average on a percentage basis are negative yet not significantly so indicating that inventories continue to be healthy and normal. Increased production in the U.S. over the past three years diminishes the need for larger inventories since production is geographically closer to consumption and the risk of disruption and disruption due to geopolitical events is lower. In this case, "risk adjusted" inventory is higher.
Below is a one year chart of average petroleum inventory as of May 23rd.
As of May 27th, the net speculative long position in petroleum futures was 435,856,000 barrels up 24,634,000 barrels (+5.99%) from the previous week. Speculation increased on the week and represents 60.48% of domestic inventories. Speculation is 24.74% above its one year moving average and is 2.86% below the 52-week high set on April 29th. The corresponding spot month diesel futures price on May 27th was 293.99 cents per gallon, down 0.93 cents from 294.92 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 42.67% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 18.22% of the price movement of diesel fuel is explained by changes in levels of speculation. 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 diesel futures price would be 281.22 cents per gallon or 12.77 cents per gallon less than current prices. The analysis would indicate that about 4.34% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up by about 2 cents on the week.
The net speculative long position has been variable over the past year ranging between 225 million and 449 million barrels with an average of about 349 million barrels, which up about 3 million barrels on the week.
The graph below is three year history of speculative position levels as of May 27th.
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.