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Prices Up - Inventory Down - Rig Count Lower - Dollar Down - Production Up
During the week ending June 12th, the spot month diesel futures price increased by 1.96 cents per gallon (+1.05%) while the deferred months increased by 0 to 3 cents per gallon making the forward pricing curve higher and unchanged in slope. The one year forward price ended the week at a 9.71 cent premium to the spot price, from a premium of 9.82 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates higher demand expectations and steady supplies with respect to demand. Demand includes speculative demand 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 12th, the spot month gasoline futures price increased by 9.11 cents per gallon (+4.49%) while the deferred months varied between -2 and +8 cents per gallon making the forward pricing curve generally higher and more negatively sloped. The one year forward price ended the week at a 17.34 cent discount to the spot price, from a discount of 10.65 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand.
The US dollar decreased 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 higher on the week to a new all-time high which is negative for price. Domestic production is up 13.59% year over year.
The attractiveness of making new hedges decreased with the higher price environment while lower speculation made new hedges more attractive.
As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging may become more attractive.
Weekly US petroleum demand increased by 4.79% during the week ending June 5th. Domestic demand is up 5.13% vs. one-year ago and demand is currently 6.13% over the five year average.
Domestic production increased to a new all-time high for the third week showing that despite the lower rig count and lower prices, domestic production continues to grow. The number of operating oil drilling rigs in the US continues to decline. During the week, the number of operating rigs in the US declined by 7 or 1.09%. The previous week's decline was 4 rigs. This will limit production growth and is beginning to show stabilization and decline in production which is helping to balance supply and demand in the market which would support price. The market has been watching this metric very closely and the sharp downturn in the number of operating rigs has contributed to the recent price increase.
Oil producers are learning how to cut costs and are getting better and finding oil more cheaply which brings down the marginal cost of production that, in turn, acts as a cap on oil prices. Also, the ability to quickly increase production in response to higher prices is improving. If supply can quickly respond to price, this increases the price elasticity of supply which would be a sea change in the fundamentals of the global oil market. Production that can quickly respond to price acts more like inventory than it does production. US domestic production and rig count will become increasingly more important to the market. Inventory is also very important as has always been true. But just because US domestic inventories are decreasing from their peaks, doesn't mean that there isn't more oil coming out of the ground globally than is going up in smoke on a daily basis which ultimately weighs on price.
Below is the one-year chart of spot diesel futures prices as of June 12th.
Below is the one-year chart of spot gasoline futures prices as of June 12th.
: : Inventories continue to decrease from the recent high levels set on April 24th. Inventories decreased by 8.89 million barrels while inventories were expected to decrease by 0.98 million barrels on the week. The five-year average inventory increased by 0.40 million barrels. Inventories decreased vs. the five year average and vs. expectations. The global market continues to be oversupplied by 1.5 to 2.0 million barrels per day which will keep downward pressure on prices
: : Stock market increasing by +.06% on the week is generally positive for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -1.39% 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.
Below is the one-year chart US stock market prices as of June 12th.
Below is the one-year chart for the US dollar index as of June 12th.
During the week ended June 5th, total petroleum inventories decreased by 8.89 million barrels vs. a five year average increase of 0.40 million barrels and vs. an expected decrease of 0.98 million barrels. Inventories decreased by 9.29 million barrels vs. the five year average. Total inventories stand at 821.4 million barrels, up from 830.3 million barrels at the end of the previous week. The five year average inventory is 724.51 million barrels, up from 724.11 million barrels at the end of the previous week.
Current inventories are 13.38% higher than the five year average, down from +14.67% at the end of the previous week.
As of June 9th, the net speculative long position in petroleum futures was 248,355,000 barrels, down 17,773,000 barrels (-6.68%) from the previous week. Speculation decreased for the first time in three weeks and represents 30.23% of domestic inventories. Speculation is 5.56% above its one year moving average. The corresponding spot month diesel futures price on June 9th was 191.79 cents per gallon, down 2.76 cents from 194.55 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 36.04% correlated over the past 52 weeks indicating that, on a statistical basis over the past year 12.99% 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 170.76 cents per gallon or 21.03 cents per gallon less than current prices. The analysis would indicate that about 10.96% of current price is attributable to speculation and its underlying market rationale. This "would be" price was higher by 2 cents on the week.
The net speculative long position has been variable over the past year ranging between 135 million and 453 million barrels with an average of about 235 million barrels, which is down about 3 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.