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Prices Lower - Rig Count Higher - Speculation Lower - Production Higher - Stock Market Lower - Inventory Higher - Dollar Higher
During the week ending May 31st, the spot month diesel futures price decreased by 12.95 cents per gallon (-6.57%) while the deferred months decreased by 8-13 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 0.27 cent discount to the spot price, from a discount of 1.81 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 31st, the spot month gasoline futures price decreased by 13.25 cents per gallon (-6.85%) while the deferred months decreased by 9 to 14 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 10.21 cent discount to the spot price, from a discount of 11.88 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 9.14% during the week ending May 24th. Domestic demand is down by 1.95% vs. one-year ago and demand is currently 0.36% below the five year average.
Domestic production increased 100,000 barrels per day for the week ending May 24th back to the record of 12.3 million barrels per day. Domestic production is 14.22% above year ago levels. The number of operating oil drilling rigs in the US increased by 3 from 797 to 800 on the week. Currently, this are 484 more than the low of 316 rigs in 2016 and 50.28% 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 3,872,000 barrels per day (+45.94%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of May 31st.
Below is the one-year chart of spot gasoline futures prices as of May 31st.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 0.31 million barrels while inventories were expected to decrease by 1.09 million barrels on the week. The five-year average inventory decreased by 3.04 million barrels. Inventories increased vs. expectations and vs. the five year average.
: : Continued trade tensions with the Chinese and the prospects of things not getting fixed any time soon and the resulting lower petroleum 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.
: : New tariff threats against Mexico increase overall trade tensions that would slow economic growth and slow petroleum demand growth which is negative for price.
: : Speculators continued to run for the sidelines for the fifth week in a row due to a static/growing supply outlook and negative demand outlook. Speculator selling is negative pressure on price.
: : Iran has ceased to be an issue for now. Saudi Arabia largely made up for their decrease in supply in May.
: : Russia produced at its quota level for the first time this year. They had been over-producing. This means that perhaps there is more discipline in Russia to curtail supply to support price along with its friends in OPEC.
: : 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 -2.62% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.14% 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 – Unchanged in May. 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. Replay of 2014?
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 31st.
Below is the one-year chart for the US dollar index as of May 31st.
During the week ended May 24th, total petroleum inventories increased by 0.31 million barrels vs. a five year average decrease of 3.04 million barrels and vs. an expected decrease of 1.09 million barrels. Inventories increased by 3.34 million barrels vs. the five year average and increased by 1.39 million barrels vs. expectations. Total inventories stand at 832.2 million barrels, up from 831.9 million barrels at the end of the previous week. The five year average inventory is 811.0 million barrels, down from 814.0 million barrels at the end of the previous week.
Current inventories are +2.62% versus the five year average, an increase on the week and the highest level since February 15th.
As of May 28th, the net speculative long position in petroleum futures was 284,521,000 barrels, down 58,930,000 barrels (-17.16%) from the previous week. Speculation decreased for the fifth week and represents 34.19% of domestic inventories. Speculation is 19.32% below its one year moving average. The corresponding spot month diesel futures price on May 28th was 199.25 cents per gallon, down 8.69 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 75.55% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 57.07% 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 353 million barrels, which is down 4 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.