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Prices Lower - Speculation Lower - US Production Down - Inventory Down
During the week ending July 8th, the spot month diesel futures price decreased by 9.92 cents per gallon (-6.56%) while the deferred months decreased by 5 to 9 cent per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 15.09 cent premium to the spot price, from a premium of 11.82 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 July 8th, the spot month gasoline futures price decreased by 14.27 cents per gallon (-9.43%) while the deferred months decreased by 6 to 13 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 16.66 cent premium to the spot price, from a premium of 11.49 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. Demand includes speculative demand which was lower on the week.
The US dollar was higher on the week which is negative for price. Inventories on the week were lower which is positive for price. The stock market, as a proxy for demand expectations, was higher which is positive 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 12.24% on a year over year basis.
Weekly US petroleum demand decreased by 5.20% during the week ending July 1st. Domestic demand is up 3.04% vs. one-year ago and demand is currently 4.96% above the five year average.
Domestic production continued its decline this week and is 12.24% below one year ago levels. The number of operating oil drilling rigs in the US increased for the second week and stands at 351 which is 10 more than the previous week and 78.19% 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. US domestic production has decreased by 791,000 barrels per day since the beginning of the year and 1,182,000 barrels per day since the peak in June 2015.
Below is the one-year chart of spot diesel futures prices as of July 8th.
Below is the one-year chart of spot gasoline futures prices as of July 8th.
MARKET FACTORS & COMMENTARY:
: : Inventories decreased by 3.92 million barrels while inventories were expected to decrease by 2.33 million barrels on the week. The five-year average inventory decreased by 1.52 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : "Brexit" continues to give strength to the US Dollar which is negative for price but is also causing lower global GDP expectations which is negative for petroleum demand expectations and price.
: : Nigerian militants have been destroying oil infrastructure causing Nigerian output to be the lowest in decades. Reports later in the week indicated that repairs are being made. The uncertainty is whether Nigeria can grow its production back to its normal level. If this happens which it eventually will, it will be negative for price.
: : OPEC production increased by 240,000 barrels per day in June despite disruptions from Nigeria. This is the highest level since January and is only 185,000 barrels per day from OPEC's all-time high production month in December 2015.
: : The Stock market increasing by 1.33% which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +0.68% on the week 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.
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 July 8th.
Below is the one-year chart for the US dollar index as of July 8th.
During the week ended July 1st, total petroleum inventories decreased by 3.92 million barrels vs. a five year average decrease of 1.52 million barrels and vs. an expected decrease of 2.33 million barrels. Inventories decreased by 2.39 million barrels vs. the five year average and decreased by 1.59 million barrels vs. expectations. Total inventories stand at 912.2 million barrels, down from 916.1 million barrels at the end of the previous week. The five year average inventory is 735.5 million barrels, down from 737.0 million barrels at the end of the previous week.
Current inventories are 24.02% higher than the five year average, down from +24.29% at the end of the previous week.
As of July 5th, the net speculative long position in petroleum futures was 188,963,000 barrels, down 11,682,000 barrels (-5.82%) from the previous week. Speculation decreased for the second week and represents 20.72% of domestic inventories. Speculation is 24.42% above its one year moving average. The corresponding spot month diesel futures price on July 5th 144.56 cents per gallon, down 2.55 cents from 147.11 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 20.08% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 4.03% 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 152 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 July 5th, the market price for spot month diesel futures is estimated to be 138.33 versus the actual price of 144.56. This indicates that the market is currently overvalued by 6.23 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.