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Prices Mixed - Inventory Steady - One Year Highs in Speculation
During the week ending July 19th, the spot month diesel fuel futures price increased by 6.00 cents per gallon (+1.98%) while the deferred months ranged from down 3 cents to up 6 cents per gallon making the forward pricing curve slightly higher and more negatively sloped. The one year forward price ended the week at a 12.97 cent (4.20%) discount to the spot price, from a discount of 9.12 cents (3.01%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates slightly higher demand expectations and lower supplies with respect to demand. Demand includes speculative demand which increased on the week and can be volatile. 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 19th, the spot month gasoline futures price increased by 0.59 cents per gallon (+0.19%) while the deferred months increased by 0 to 3 cents per gallon making the forward pricing curve slightly higher and slightly more negatively sloped. The one year forward price ended the week at a 35.87 cent (12.97%) discount to the spot price, from a discount of 36.02 cents (13.06%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates relatively steady demand expectations and relatively steady inventory levels with respect to supply and demand.
The US dollar was lower on the week which is positive for price. Inventories on the week were steady and remain above historical averages. This is neutral for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was higher on the week which is positive for price. US domestic crude production continues to be strong and increased on the week which is negative for price. Geopolitical risk continues to be a background factor that is supportive of price.
Weekly US petroleum demand increased by 1.19% during the week ending July 12th. Demand is up by 2.99% vs. one year ago and demand is currently 2.43% above the five year average.
The attractiveness of making new hedges decreased on the week given the slightly higher price environment and higher speculation levels. Speculation was higher on the week indicating that new hedges would require more competition with market speculation. 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 one year chart of spot diesel futures prices as of July 19th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of July 19th.
Factors affecting the market on the period were:
During the week ended July 12th, total petroleum inventories increased by 0.02 million barrels vs. a five year average increase of 2.94 million barrels and vs. an expected decrease of 0.70 million barrels. Inventories decreased by 2.92 million barrels vs. the five year average. Total inventories stand at 718.8 million barrels, up from 718.8 million barrels at the end of the previous week. The five year average inventory is 703.4 million barrels, up from 700.5 million barrels at the end of the previous week.
Current inventories are 2.18% larger than the five year average down from +2.61% at the end of the previous week. Inventories versus the five year average on a percentage basis remain positive. This helps to mitigate the effects of supply disruption and decreases price volatility.
As of July 16th, the net speculative long position in petroleum futures was 367,875,000 barrels up 55,323,000 barrels (+17.70%) from the previous week. The level of speculation increased for the third week in a row and represents 51.18% of domestic inventories. Speculation is 40.66% above its one year moving average and is at the 52 week high level. Speculative levels returned to near the middle of the past year's range. The corresponding spot month heating oil futures price on June 25th was 285.84 cents per gallon, down 10.33 cents from 296.17 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 73.14% correlated over the past 52 weeks (a decrease on the week) indicating that, on a statistical basis over the past year 53.50% of the price movement of diesel fuel is explained by changes in levels of speculation. This statistical relationship continues to become weaker and remains significant. 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 heating oil futures price would be 247.89 cents per gallon or 37.95 cents per gallon less than current prices. The analysis would indicate that about 13.28% of current price is attributable to speculation and its underlying market rationale. The "would be" price was up about 4.0 cents on the week.
The net speculative long position has been variable over the past year ranging between 178 million and 360 million barrels with an average of about 254 million barrels, which was an increase of about 2 million barrels on the week.
The graph below is three year history of speculative position levels.
Linwood Capital, LLC is an institutional fuel hedging management and consulting firm. Linwood creates and manages customized fuel hedging programs primarily for public clients on a nationwide basis.