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Petroleum Market Commentary - July 22, 2019

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Prices Lower - Rig Count Lower - Speculation Higher - Production Lower - Stock Market Lower - Inventory Higher - Dollar Higher

DIESEL:

During the week ending July 19th, the spot month diesel futures price decreased by 9.05 cents per gallon (-4.57%) while the deferred months decreased by 5 to 9 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 1.91 cent discount to the spot price, from a discount of 2.56 cents at the end of the previous week.

The level and slope of the diesel forward pricing curve indicates lower demand expectations and higher 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.

GASOLINE:

During the week ending July 19th, the spot month gasoline futures price decreased by 13.65 cents per gallon (-6.90%) while the deferred months decreased by 10 to 13 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 12.34 cent discount to the spot price, from a discount of 15.69 cents and the end of the previous week.

The change in level and shape of the forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.

ANALYSIS:

DEMAND:

Weekly US petroleum demand decreased by 4.63% during the week ending July 12th. Domestic demand is up by 0.56% vs. one-year ago and demand is currently 2.96% above the five year average.

PRODUCTION:

Domestic production decreased 100,000 barrels per day for the week ending July 12th to 12 million barrels per day. This drop in production is mostly due to hurricane Barry in the gulf which caused disruption in production in that region. Domestic production is 9.09% above year ago levels. The number of operating oil drilling rigs in the US decreased by 5 from 784 to 779 on the week making a new near-term low and the lowest level since February 2, 2018. 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 3,572,000 barrels per day (+42.38%) since the low on July 1, 2016.









Below is the one-year chart of spot diesel futures prices as of July 19th.



Below is the one-year chart of spot gasoline futures prices as of July 19th.

MARKET FACTORS & COMMENTARY:

: :  Petroleum inventories increased for the first time in five weeks by 6.14 million barrels while inventories were expected to decrease by 5.36 million barrels on the week. The five-year average inventory decreased by 1.73 million barrels. Inventories increased vs. expectations and vs. the five year average.

: :  Prices were supported earlier in the week by Hurricane Barry disrupting production in the Gulf of Mexico. 73% of production was halted as the storm passed by. This halt was quickly restarted as the weather improved. This halt is the reason for the lower US domestic crude production on the week.

: :  The US threatened new tariffs on China signaling perhaps increased economic pain for China and, by extension, the global economy. New tariffs would mean already weak petroleum demand forecasts would be revised downward which is negative for price.

: :  Iran seized a British tanker in the Persian Gulf thus escalating tensions and supporting price as this action increases the likelihood of actual supply disruption. The US also announced that it had shot down an Iranian drone, a report that Iran denied.

: :  The Stock market decreased by -1.23% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.

: :  The US Dollar increased by +0.35% 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 and prices decrease accordingly. Conversely, a weaker dollar increases relative demand for commodities and prices increase.

OPEC Production Five Year History – Down 130,000 barrels per day in June. This low level of OPEC production continues to be supportive of price. OPEC production remaining at the five 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 July 2019. The chart shows the expectation of a roughly balanced market through 2020 with the exception of second quarter 2020. This forecast indicates little change from the June forecast regarding expectations of supply/demand balance.

JULY FORECAST



Below is the one-year chart of the US stock market as of July 19th.



Below is the one-year chart of the US stock market as of July 19th.



INVENTORIES:

During the week ended July 12th, total petroleum inventories increased by 6.14 million barrels vs. a five year average decrease of 1.73 million barrels and vs. an expected decrease of 5.36 million barrels. Inventories increased by 7.86 million barrels vs. the five year average and increased by 11.50 million barrels vs. expectations. Total inventories stand at 824.8 million barrels, up from 818.7 million barrels at the end of the previous week. The five year average inventory is 799.4 million barrels, down from 801.1 million barrels at the end of the previous week.

Current inventories are +3.18% versus the five year average, an increase on the week from +2.20%.



SPECULATION:

As of July 16th, the net speculative long position in petroleum futures was 307,336,000 barrels, up 19,102,000 barrels (+19.01%) from the previous week. Speculation increased for the fifth week in a row and represents 37.26% of domestic inventories. Speculation is 2.63% below its one year moving average. The corresponding spot month diesel futures price on July 16th was 190.49 cents per gallon, down 0.57 cents per gallon from the prior week.

Diesel fuel price and size of speculative net long position in petroleum are 78.74% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 62.00% 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 552 million barrels with an average of about 316 million barrels, which is down 5 million barrels on the week.



CONTACT:

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.