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Prices Higher - Inventory Higher - Speculation Lower
During the week ending July 25th, the spot month diesel futures price increased by 7.05 cents per gallon (+2.48%) while the deferred months increased by 3 to 6 cents per gallon making the forward pricing curve higher and negatively sloped. The one year forward price ended the week at a 1.67 cent discount to the spot price, from a premium of 0.90 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates higher demand expectations and lower 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 25th.
During the week ending July 25th, the spot month gasoline futures price increased by 0.50 cents per gallon (+0.17) while the deferred months increased by 1 to 4 cents per gallon making the forward pricing curve higher and less negatively sloped. The one year forward price ended the week at a 10.04 cent discount to the spot price, from a discount of 12.24 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher 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 25th.
The US dollar was higher on the week which is negative for price. Inventories on the week were higher which is negative 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 decreased on the week which is positive for price.
Weekly US petroleum demand increased by 0.18% during the week ending July 18th. Domestic demand is down 2.05% vs. one-year ago and demand is currently 0.59% over the five year average.
The attractiveness of making new hedges decreased on the week as prices increased. 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 18th.
Below is a chart of average vs. five-year demand as of July 18th.
Below is the one-year chart of spot diesel futures prices as of July 25th.
Below is the one-year chart of spot gasoline futures prices as of July 25th.
: : Inventories increasing by 1.05 million barrels while inventories were expected to increase by 0.40 million barrels on the week. The five-year-average inventory increased by 4.62 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : The near-term rise in Libya's exports is causing a temporary slight oversupply in the market which is negative for price.
: : Continuing Russia-Ukraine turmoil boosted price on Friday the 25th to the highest level of the week. This situation will continue to support price as it remains uncertain.
: : Iran continues to export crude and will continue to do so for the next four months since the negotiations regarding Iran's nuclear capabilities have been extended. This is an unexpected increase in supply which is negative for price.
: : US refinery capacity utilization increased to 93.8% which is 3.1% above the five year seasonally adjusted level. This is an indication of strong demand which is supportive of price.
: : The US Stock market increasing by 0.01% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.63% 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 18th, total petroleum inventories increased by 1.05 million barrels vs. a five year average increase of 4.62 million barrels and vs. an expected increase of 0.40 million barrels. Inventories decreased by 3.57 million barrels vs. the five year average. Total inventories stand at 714.9 million barrels, down from 713.8 million barrels at the end of the previous week. The five year average inventory is 724.4 million barrels, up from 719.8 million barrels at the end of the previous week.
Current inventories are 1.32% lower than the five year average down from -0.83% 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 18th.
Below is the chart of current inventory vs. the five year average as of July 18th.
As of July 22nd, the net speculative long position in petroleum futures was 310,711,000 barrels down 1,034,000 barrels (-0.33%) from the previous week. Speculation decreased on the week and represents 43.46% of domestic inventories. Speculation is 14.80% below its one year moving average. The corresponding spot month diesel futures price on July 22nd was 285.42 cents per gallon, down 0.13 cents from 285.55 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 20.34% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 4.14% 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 289.06 cents per gallon or 3.64 cents per gallon more than current prices. The analysis would indicate that about -1.20% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about one cent 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 365 million barrels, which is down about 2 million barrels on the week.
The graph below is three year history of speculative position levels as of July 22nd.
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.