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Prices Lower - Rig Count Lower - Speculation Lower - Production Higher - Stock Market Higher - Inventory Higher - Dollar Lower
During the week ending June 7th, the spot month diesel futures price decreased by 1.56 cents per gallon (-0.85%) while the deferred months changed by -1 to +2 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 0.70 cent discount to the spot price, from a premium of 0.27 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 June 7th, the spot month gasoline futures price decreased by 3.25 cents per gallon (-1.83%) while the deferred months changed by -3 to +2 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 6.41 cent discount to the spot price, from a discount of 10.21 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 decreased by 9.36% during the week ending May 31st. Domestic demand is down by 0.59% vs. one-year ago and demand is currently 4.64% above the five year average.
Domestic production increased 100,000 barrels per day for the week ending May 31st to a new all-time high of 12.4 million barrels per day. Domestic production is 14.81% above year ago levels. The number of operating oil drilling rigs in the US decreased by 11 from 800 to 789 on the week. Currently, this are 473 more than the low of 316 rigs in 2016 and 50.96% 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 but have slowed the pace of developing new wells. 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 3,972,000 barrels per day (+47.13%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of June 7th.
Below is the one-year chart of spot gasoline futures prices as of June 7th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 14.55 million barrels while inventories were expected to decrease by 0.17 million barrels on the week. The five-year average inventory increased by 2.39 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.
: : Speculators continued to move to the sidelines for the sixth week in a row due to a static/growing supply outlook and negative demand outlook. Speculator selling is negative pressure on price.
: : OPEC + Friends are indicating that they will continue with the supply cuts for another six months. While this is limiting for supply, it remains to be seen how the group will fare in an environment of slower demand growth when producers are fighting for market share. Despite their cuts, the market may become oversupplied causing prices to drop.
: : US inventory rose significantly on the 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 increased by +4.41% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -1.23% 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 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 June 2019. The chart shows the expectation of a roughly balanced market through 2020. This forecast indicates little change from the May forecast regarding expectations of supply/demand balance.
Below is the one-year chart of the US stock market as of June 7th.
Below is the one-year chart of the US stock market as of June 7th.
During the week ended May 31st, total petroleum inventories increased by 14.55 million barrels vs. a five year average increase of 2.39 million barrels and vs. an expected decrease of 0.17 million barrels. Inventories increased by 12.16 million barrels vs. the five year average and increased by 14.72 million barrels vs. expectations. Total inventories stand at 846.8 million barrels, up from 832.2 million barrels at the end of the previous week. The five year average inventory is 813.4 million barrels, up from 811.0 million barrels at the end of the previous week.
Current inventories are +4.11% versus the five year average, an increase on the week and the highest level since February 15th.
As of June 4th, the net speculative long position in petroleum futures was 252,362,000 barrels, down 32,159,000 barrels (-11.30%) from the previous week. Speculation decreased for the sixth week and represents 29.80% of domestic inventories. Speculation is 27.50% below its one year moving average. The corresponding spot month diesel futures price on June 4th was 182.15 cents per gallon, down 17.10 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 75.66% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 57.24% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation increased slightly from the previous week.
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 348 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.