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Prices Down - Speculation Plummets - Rig Count Increasing - Iranian Oil
During the week ending July 31st, the spot month diesel futures price decreased by 4.62 cents per gallon (-2.83%) while the deferred months decreased by 0 to 4 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 13.28 cent premium to the spot price, from a premium of 11.56 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 sharply 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.
During the week ending July 31st, the spot month gasoline futures price increased by 1.28 cents per gallon (+0.70%) while the deferred months decreased by 1 to 3 cents per gallon making the forward pricing curve lower and relatively unchanged in slope. The one year forward price ended the week at a 14.90 cent discount to the spot price, from a discount of 11.16 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations except in the immediate term and higher inventory levels with respect to supply and demand.
The US dollar increased on the week which is negative for price. Inventories on the week were lower and lower than expectations which is negative for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was sharply lower on the week which is negative for price. US domestic crude production was lower which is positive for price. Domestic production is up 11.49% year over year.
The attractiveness of making new hedges increased with the lower price environment and sharply lower speculation.
As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging may become more attractive.
Weekly US petroleum demand decreased by 3.69% during the week ending July 24th. Domestic demand is up 3.79% vs. one-year ago and demand is currently 4.01% over the five year average.
Domestic production decreased on the week. The number of operating oil drilling rigs in the US increased for the fourth time in five weeks indicating that the long decline in domestic drilling activity is over and that drilling new wells is economically viable. This is negative for price. Rig count increased by 5 and the previous week's increase was 21. This increase in rig count is a significant factor in lower speculation and lower price.
OPEC production is up over 1 million barrels in the past three months and the imbalance in supply and demand is expected to last longer that was first thought. This will keep prices low for the short to medium-term. As global demand grows to meet supply and the market becomes balanced, prices will increase. If demand does not grow as quickly as expected, prices will fall to curtail supply.
Below is the one-year chart of spot diesel futures prices as of July 31st.
Below is the one-year chart of spot gasoline futures prices as of July 31st.
: : Inventories decreased by 1.98 million barrels while inventories were expected to increase by 1.27 million barrels on the week. The five-year average inventory decreased by 1.66 million barrels. Inventories decreased vs. the five year average and vs. expectations. The global market continues to be oversupplied by 1.5 to 2.5 million barrels per day which will keep downward pressure on prices
: : An increasing expectations that Congress will not be able to block the administration's move to lift sanctions on Iran which means that it is increasingly likely that Iranian crude supplied to the global market will, in some measure, increase in December. This expectation of increased supply is negative for price.
: : A plunge in the Chinese stock market and a bit of a rebound later in the week showed weakness in the Chinese economy which is negative for petroleum demand expectations and price.
: : Chinese manufacturing purchasing managers' index (PMI) declined to a 15-month low which indicates cooling in the Chinese economy which is negative for petroleum demand expectations in China and petroleum prices.
: : Eurozone July Markit manufacturing PMI unexpectedly dropped showing relative weakness in the European economy which is negative for demand expectations and price.
: : Stock market increasing by +1.16% on the week is generally positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +0.09% 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.
Below is the one-year chart US stock market prices as of July 31st.
Below is the one-year chart for the US dollar index as of July 31st.
During the week ended July 24th, total petroleum inventories decreased by 1.98 million barrels vs. a five year average decrease of 1.66 million barrels and vs. an expected increase of 1.27 million barrels. Inventories decreased by 0.32 million barrels vs. the five year average. Total inventories stand at 819.7 million barrels, down from 821.7 million barrels at the end of the previous week. The five year average inventory is 721.0 million barrels, down from 722.7 million barrels at the end of the previous week.
Current inventories are 13.68% higher than the five year average, down from +13.70% at the end of the previous week.
As of July 28th, the net speculative long position in petroleum futures was 92,469,000 barrels, down 10,629,000 barrels (-10.31%) from the previous week. Speculation decreased for the sixth week in a row and is at its lowest point since August 31st, 2010. Current speculation represents 11.28% of domestic inventories. Speculation is 55.59% below its one year moving average. The corresponding spot month diesel futures price on July 28th was 160.44 cents per gallon, down 7.40 cents from 167.84 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are -7.85% correlated over the past 52 weeks indicating that, on a statistical basis over the past year speculation does not explain price. As we have seen the market overwhelmed by supply, petroleum market fundamentals have taken the role of setting price and speculators are less able to move price. With the current over supply situation and the expectation that this will persist, long-side speculation will remain low and have a muted effect on price as we have seen. Correlation of speculation and price and the level of speculation appear to be correlated where there is high correlation of price and speculation when speculation is high as we have seen in the past three years, and vice-versa is true as we are seeing now.
The net speculative long position has been variable over the past year ranging between 92 million and 285 million barrels with an average of about 208 million barrels, which is down about 4 million barrels on the week.
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.