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Prices Lower - Inventory Higher - Speculation Lower
During the week ending May 31st, the spot month heating oil futures price decreased by 6.48 cents per gallon (-2.27%) while the deferred months decreased by 4 to 8 cents per gallon making the forward pricing curve lower and slightly positively sloped over the next year. The one year forward price ended the week at a 1.48 cent (0.53%) premium to the spot price, from a premium of 0.75 cents (0.26%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates lower demand expectations and higher supplies with respect to demand. Demand includes speculative demand which decreased 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 31st, the spot month gasoline futures price decreased by 6.01 cents per gallon (-2.12%) while the deferred months decreased by 6 to 7 cents per gallon making the forward pricing curve lower and more negatively sloped. The one year forward price ended the week at a 10.66 cent (3.99%) discount to the spot price, from a discount of 9.49 cents (3.46%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and lower inventory levels with respect to supply and demand.
The US dollar was lower on the week which is positive 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 lower which is negative for price. Speculation was lower on the week which is negative of price. US domestic crude production continues to be strong and increased on the week which is negative for price. Geopolitical risk continues to be a background factor that is supportive of price.
Weekly US petroleum demand decreased by 2.97% during the week ending May 24th. Demand is up by 0.17% vs. one year ago and demand is currently 3.23% below the five year average.
The attractiveness of making new hedges increased slightly on the week given the lower price environment. Speculation was lower on the week indicating that new hedges will require less competition with market 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. 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 31st.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of May 31st.
Factors affecting the market on the period were:
During the week ended May 24th, total petroleum inventories increased by 3.34 million barrels vs. a five year average decrease of 1.23 million barrels and vs. an expected decrease of 2.90 million barrels. Inventories increased by 4.57 million barrels vs. the five year average. Total inventories stand at 737.4 million barrels, up from 734.0 million barrels at the end of the previous week. The five year average inventory is 702.1 million barrels, down from 703.3 million barrels at the end of the previous week.
Current inventories are 5.03% larger than the five year average up from +4.37% 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 28th, the net speculative long position in petroleum futures was 240,712,000 barrels down 19,071,000 barrels (-7.34%) from the previous week. The level of speculation decreased for the first time in five weeks and represents 32.64% of domestic inventories. Speculation is 3.03% below its one year moving average and is 33.10% below the 52 week high level. Speculative levels are just below the average of the past year's range. The corresponding spot month heating oil futures price on May 28th was 290.66 cents per gallon, down 2.24 cents from 292.90 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 78.05% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 60.92% 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 233.87 cents per gallon or 56.79 cents per gallon less than current prices. The analysis would indicate that about 19.54% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up about one half of one cent 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 248 million barrels, which was nearly 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.