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Prices Down - Speculation Steady - Rig Count Increasing
During the week ending August 7th, the spot month diesel futures price decreased by 4.53 cents per gallon (-2.85%) while the deferred months decreased by 5 to 7 cents per gallon making the forward pricing curve lower and less positively sloped. The one year forward price ended the week at a 12.64 cent premium to the spot price, from a premium of 13.28 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 lower supplies with respect to demand. Demand includes speculative demand which was slightly 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.
During the week ending August 7th, the spot month gasoline futures price decreased by 14.90 cents per gallon (-8.41%) while the deferred months decreased by 5 to 11 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 2.75 cent discount to the spot price, from a discount of 14.90 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.
The US dollar increased on the week which is negative for price. Inventories on the week were lower and lower than expectations which is positive for price. The stock market, as a proxy for demand expectations, was lower which is negative for price. Speculation was higher on the week which is positive for price. US domestic crude production was higher which is negative for price. Domestic production is up 11.97% year over year.
The attractiveness of making new hedges increased with the lower price environment.
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 0.12% during the week ending July 31st. Domestic demand is up 3.59% vs. one-year ago and demand is currently 3.62% over the five year average.
Domestic production increased on the week. The number of operating oil drilling rigs in the US increased for the fifth time in six 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 6 and the previous week's increase was 5. This increase in rig count is a significant factor in lower speculation and lower price.
OPEC production is up 6.52% year over year and the imbalance in supply and demand is expected to last longer that was first thought and into 2016. 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 August 7th.
Below is the one-year chart of spot gasoline futures prices as of August 7th.
: : Inventories decreased by 2.89 million barrels while inventories were expected to increase by 0.26 million barrels on the week. The five-year average inventory decreased by 4.32 million barrels. Inventories increased vs. the five year average and decreased 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
: : Iran indicating that it will raise production by 500,000 barrels per day after sanctions are lifted thereby increasing the current oversupply in the market. This is, of course, negative for price.
: : While the Chinese stock market bounced up by 3%, the gauge of Chinese manufacturing dropped at the fastest pace in two years thus lowering expectations of Chinese petroleum demand growth. This is negative for price.
: : Goldman Sachs reporting that current global petroleum oversupply is 2 million barrels per day and that storage facilities to house the excess inventories may fill by autumn. This is negative for price.
: : Stock market decreasing by -1.25% on the week is generally positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +0.23% 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 August 7th.
Below is the one-year chart for the US dollar index as of August 7th.
During the week ended July 31st, total petroleum inventories decreased by 2.89 million barrels vs. a five year average decrease of 4.32 million barrels and vs. an expected increase of 0.26 million barrels. Inventories increased by 1.43 million barrels vs. the five year average. Total inventories stand at 816.8 million barrels, down from 819.7 million barrels at the end of the previous week. The five year average inventory is 716.7 million barrels, down from 721.0 million barrels at the end of the previous week.
Current inventories are 13.97% higher than the five year average, up from +13.68% at the end of the previous week.
As of August 4th, the net speculative long position in petroleum futures was 99,488,000 barrels, up 7,019,000 barrels (+7.59%) from the previous week. Speculation increased for the first time in seven weeks and represents 12.18% of domestic inventories. Speculation is 51.56% below its one year moving average. The corresponding spot month diesel futures price on August 4th was 154.75 cents per gallon, down 5.69 cents from 160.44 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are -4.52 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 the market 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.
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 205 million barrels, which is down about 3 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.