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Prices Lower - Speculation Lower - US Production Down - Inventory Down
During the week ending June 3rd, the spot month diesel futures price decreased by 1.34 cents per gallon (-0.89%) while the deferred months decreased by 0 to 2 cent per gallon making the forward pricing curve slightly lower and slightly more positively sloped. The one year forward price ended the week at a 7.78 cent premium to the spot price, from a premium of 7.82 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates lower demand expectations and higher inventories with respect to demand. Demand includes speculative demand which decreased 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 June 3rd, the spot month gasoline futures price decreased by 3.03 cents per gallon (-1.85%) while the deferred months decreased by 1 to 3 cents per gallon making the forward pricing curve lower and slightly more positively sloped. The one year forward price ended the week at a 3.87 cent premium to the spot price, from a premium of 2.44 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Supply includes speculation which was lower on the week.
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 virtually unchanged which is neutral for price. Speculation was lower on the week which is negative for price. US domestic crude production was lower which is positive for price. Domestic production is down 8.88% on a year over year basis.
Weekly US petroleum demand decreased by 0.41% during the week ending May 27th. Domestic demand is up 2.23% vs. one-year ago and demand is currently 9.33% above the five year average.
Domestic production continued its decline this week and is 8.88% below one year ago levels. The number of operating oil drilling rigs in the US continued to fall and stands at 325 which is 9 more than the previous week and 79.80% lower than the peak in October 2014. A higher rig count is negative for price. The generally lower rig count is causing US production to move downward as part of the global rebalancing of supply and demand. It is expected that US crude production will decrease to around 8.5 million barrels per day by year end. US domestic production has decreased by 484,000 barrels per day since the beginning of the year.
Below is the one-year chart of spot diesel futures prices as of June 3rd.
Below is the one-year chart of spot gasoline futures prices as of June 3rd.
MARKET FACTORS & COMMENTARY:
: : Inventories decreased by 4.11 million barrels while inventories were expected to decrease by 4.12 million barrels on the week. The five-year average inventory decreased by 0.02 million barrels. Inventories decreased vs. the five year average and were in line with expectations.
: : Canadian production due to wildfires in Alberta continues to be shut in. However, the situation is improving and Canadian production is coming back on line. This is positive for supply and supply expectations and negative for price.
: : Nigerian production decreased to a 20 year low as militant attacks of oil facilities have disrupted supply. The timeframe in which this production returns to the market is uncertain. This situation is negative for supply and supportive of price.
: : OPEC's meeting in Vienna resulted in keeping the current strategy of defending market share with high production levels. Output changes or ceilings were not announced.
: : The Stock market was virtually unchanged on the week which is neutral for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -1.56% on the week 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.
The charts below show supply and demand history and expectations in May and June. Supply and demand have begun to rebalance which is the main cause of increasing prices. The May and June forecasts are roughly the same regarding the time frame in which the market will rebalance.
Below is the one-year chart US stock market prices as of June 3rd.
Below is the one-year chart for the US dollar index as of June 3rd.
During the week ended May 27th, total petroleum inventories decreased by 4.11 million barrels vs. a five year average decrease of 0.02 million barrels and vs. an expected decrease of 4.12 million barrels. Inventories decreased by 4.09 million barrels vs. the five year average and increased by 0.01 million barrels vs. expectations. Total inventories stand at 923.9 million barrels, down from 928.1 million barrels at the end of the previous week. The five year average inventory is 743.1 million barrels, down from 743.1 million barrels at the end of the previous week.
Current inventories are 24.33% higher than the five year average, down from +24.88% at the end of the previous week.
As of May 31st, the net speculative long position in petroleum futures was 272,338,000 barrels, down 4,231,000 barrels (-1.53%) from the previous week. Speculation decreased for the second consecutive week and represents 29.48% of domestic inventories. Speculation is 78.06% above its one year moving average. The corresponding spot month diesel futures price on May 31st was 149.75 cents per gallon, up 0.88 cents from 148.87 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 32.55% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 10.60% of diesel fuel price movements are explained by changes in level of speculation.
The net speculative long position has been variable over the past year ranging between 57 million and 277 million barrels with an average of about 153 million barrels, which is unchanged on the week.
Based on a multiple regression analysis considering the level of the dollar, speculation, and inventory over the past five years as of May 31st, the market price for spot month diesel futures is estimated to be 142.53 versus the actual price of 149.75. This indicates that the market is currently overvalued by 7.22 cents per gallon given the assumptions of the pricing model.
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.