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Prices Higher - Rig Count Higher - Speculation Higher - Production Lower - Stock Market Higher - Inventory Lower - Dollar Lower
During the week ending June 21st, the spot month diesel futures price increased by 8.64 cents per gallon (+4.72%) while the deferred months increased by 2 to 5 cents per gallon making the forward pricing curve higher and negatively sloped. The one year forward price ended the week at a 1.01 cent discount to the spot price, from a premium of 0.29 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher demand expectations and lower inventories with respect to demand. Demand also includes speculation which was higher 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 21st, the spot month gasoline futures price increased by 12.36 cents per gallon (+7.13%) while the deferred months increased by 7 to 11 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 10.29 cent discount to the spot price, from a discount of 6.95 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.
Weekly US petroleum demand decreased by 1.50% during the week ending June 14th. Domestic demand is up by 1.80% vs. one-year ago and demand is currently 2.86% above the five year average.
Domestic production decreased 100,000 barrels per day for the week ending June 14th to 12.2 million barrels per day. Domestic production is 11.93% above year ago levels. The number of operating oil drilling rigs in the US increased by 1 from 788 to 789 on the week. Currently, this is 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 3,772,000 barrels per day (+44.76%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of June 21st.
Below is the one-year chart of spot gasoline futures prices as of June 21st.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories decreased for the first time in six weeks by 5.35 million barrels while inventories were expected to decrease by 0.68 million barrels on the week. The five-year average inventory decreased by 0.15 million barrels. Inventories decreased vs. expectations and vs. the five year average.
: : Trade negotiations are back on with China. A resolution would be positive for economic growth expectations, petroleum demand expectations and price. Failure to resolve may cause further tariffs on Chinese goods entering the US which would be negative for price and demand expectations.
: : The Federal Reserve at its meeting on the 19th indicated that there may be a rate cut at the July meeting. This cut in rates would cause the US Dollar to be weaker which is positive for petroleum prices. The US Dollar was lower on the week. The rate cut could stimulate economic activity which is positive for petroleum demand growth expectations which is also positive for price. However, a rate cut may indicate a soft spot in the economy which would be negative for petroleum demand expectations and price.
: : OPEC + Friends agreed on a meeting in early July where they will discuss whether or not to keep the production cuts that they have had in place since December. Continuing cuts would most likely cause global inventories to shrink by 500,000 barrels per day during the second half of 2019. This would support price.
: : Iran attacked and shot down an American drone aircraft elevating the level of geopolitical risk in the region and the possibility of a supply disruption in the Persian Gulf. This is after Iran attacked two tankers in the area the previous week. The US retaliated with additional sanctions on Iran and its leadership. This situation is supportive of price.
: : The largest refinery on the east coast caught fire and exploded and will not be re-opened. This unexpected decrease in refining capacity has caused the price of gasoline and diesel fuel in the region to increase. This will not affect diesel and gasoline prices in most of the country but only in the Northeast. However, since the diesel and gasoline futures contracts are priced in that region, the value of hedges will be positively impacted without local rack prices increasing because of this outage.
: : 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 +2.20% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -1.39% 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 21st.
Below is the one-year chart of the US stock market as of June 21st.
During the week ended June 14th, total petroleum inventories decreased by 5.35 million barrels vs. a five year average decrease of 0.15 million barrels and vs. an expected decrease of 0.68 million barrels. Inventories decreased by 5.20 million barrels vs. the five year average and decreased by 4.67 million barrels vs. expectations. Total inventories stand at 843.4 million barrels, down from 848.8 million barrels at the end of the previous week. The five year average inventory is 810.8 million barrels, down from 811.0 million barrels at the end of the previous week.
Current inventories are +4.02% versus the five year average, a decrease on the week and the first decrease vs. the five year average in ten weeks.
As of June 18th, the net speculative long position in petroleum futures was 208,138,000 barrels, up 23,286,000 barrels (+12.60%) from the previous week. Speculation increased for the first time in 8 weeks and represents 24.68% of domestic inventories. Speculation is 38.38% below its one year moving average. The corresponding spot month diesel futures price on June 18th was 182.78 cents per gallon, up 0.57 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 76.69% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 58.81% 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 338 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.