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Prices Lower - Inventory Lower - Speculation Sharply Lower
During the week ending July 18th, the spot month diesel futures price decreased by 1.57 cents per gallon (-0.55%) while the deferred months decreased by 0 to 2 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 0.90 cent premium to the spot price, from a premium of 0.36 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 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.
Below is a one week chart of the diesel forward pricing curve as of July 18th.
During the week ending July 18th, the spot month gasoline futures price decreased by 4.82 cents per gallon (-1.66) while the deferred months decreased by 2 to 4 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 12.24 cent discount to the spot price, from a discount of 14.76 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.
Below is a one week chart of the gasoline forward pricing curve as of July 18th.
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 increased to a new 28 year high which is negative for price. Domestic production is up 14.71% year over year.
Weekly US petroleum demand increased by 0.15% during the week ending July 11th. Domestic demand is down 1.67% vs. one-year ago and demand is currently 1.87% over the five year average.
The attractiveness of making new hedges increased on the week as prices and speculation both decreased. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive.
Below is a chart of three-year domestic crude production as of July 11th.
Below is a chart of average vs. five-year demand as of July 11th.
Below is the one-year chart of spot diesel futures prices as of July 18th.
Below is the one-year chart of spot gasoline futures prices as of July 18th.
: : Inventories decreasing by 4.83 million barrels while inventories were expected to increase by 0.20 million barrels on the week. The five-year-average inventory increased by 1.23 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : Libya's production increasing from an estimated 350,000 barrels per day to 550,000 barrels per day after an agreement was struck with rebels that allowed the port used for oil export to be re-opened. This immediate increase in available global supply has a negative effect on price.
: : Increased geopolitical tensions in the wake of the Malaysian Air flight 17 being shot down in Ukraine. The uncertainty that this situation caused invites speculators and is supportive of price.
: : The extension of negotiations with Iran regarding its nuclear program bought more time before there is increased difficulty and/or sanctions against Iran meaning that, for the time being, the flow of oil from Iran will not diminish.
: : The US Stock market increasing by 0.46% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.46% 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.
During the week ended July 11th, total petroleum inventories decreased by 4.83 million barrels vs. a five year average increase of 1.23 million barrels and vs. an expected increase of 0.20 million barrels. Inventories decreased by 6.06 million barrels vs. the five year average. Total inventories stand at 713.8 million barrels, down from 718.7 million barrels at the end of the previous week. The five year average inventory is 719.8 million barrels, up from 718.6 million barrels at the end of the previous week.
Current inventories are 0.83% lower than the five year average down from +.01% at the end of the previous week. Inventory levels continue to remain close to the five year average.
Below is the chart of current inventory as a percentage of the five year average as of July 11th.
Below is the chart of current inventory vs. the five year average as of July 11th.
As of July 15th, the net speculative long position in petroleum futures was 311,745,000 barrels down 80,445,000 barrels (-20.51%) from the previous week. Speculation decreased on the week and represents 43.49% of domestic inventories. Speculation is 15.05% below its one year moving average. The corresponding spot month diesel futures price on July 15th was 285.55 cents per gallon, down 1.81 cents from 287.36 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 19.74% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 3.90% 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 289.89 cents per gallon or 4.34 cents per gallon more than current prices. The analysis would indicate that about -1.42% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about two cents lower on the week.
The net speculative long position has been variable over the past year ranging between 246 million and 453 million barrels with an average of about 367 million barrels, which is down about 1 million barrels on the week.
The graph below is three year history of speculative position levels as of July 15th.
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.