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Prices Steady - Inventory Lower - Speculation at 14-Month Low
During the week ending August 15th, the spot month diesel futures price decreased by 2.89 cents per gallon (-1.00%) while the deferred months changed from between up two cent to down three cents making the forward pricing curve steady and less negatively sloped. The one year forward price ended the week at a 0.71 cent premium to the spot price, from a discount of 1.61 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates steady 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.
Below is a one week chart of the diesel forward pricing curve as of August 15th.
During the week ending August 15th, the spot month gasoline futures price decreased by 5.51 cents per gallon (-2.00%) while the deferred months increased by 0 to 5 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 2.60 cent discount to the spot price, from a discount of 6.38 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.
Below is a one week chart of the gasoline forward pricing curve as of August 15th.
The US dollar was higher on the week which is negative for price. Inventories on the week were lower which is positive 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 was higher which is negative for price. Domestic production is up 13.01% year over year.
Weekly US petroleum demand decreased by 2.51% during the week ending August 8th. Domestic demand is up 1.09% vs. one-year ago and demand is currently 1.30% over the five year average.
The attractiveness of making new hedges increased on the week as prices were lower and speculation was lower. 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 August 8th.
Below is a chart of average vs. five-year demand as of August 8th.
Below is the one-year chart of spot diesel futures prices as of August 15th.
Below is the one-year chart of spot gasoline futures prices as of August 15th.
: : Inventories decreasing by 2.18 million barrels while inventories were expected to decrease by 3.25 million barrels on the week. The five-year-average inventory decreased by 3.04 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : The International Energy Agency (IEA) reduced its global petroleum demand forecasts for the remainder of 2014 and 2015 by 180,000 and 90,000 barrels per day respectively. This amounts to a decrease of 0.2% and 0.1% respectively. This is negative for price.
: : Weaker than expected second quarter Eurozone GDP indicating unexpected economic weakness in the Eurozone which is negative for petroleum demand expectations and price.
: : Expectations that Libyan supply will increase as its largest oil exporting port is set to open soon. This would increase the immediate supply of crude on the world market which is negative for price.
: : Stronger than expected US July industrial production showing signs of domestic economic strength which is positive for petroleum demand expectations and price.
: : Ongoing concerns about the situation in Ukraine and how it might affect global petroleum markets continue to support the market as uncertainty continues.
: : Stock market increasing by 1.22% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.04% 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 August 8th, total petroleum inventories decreased by 2.18 million barrels vs. a five year average decrease of 3.04 million barrels and vs. an expected decrease of 3.25 million barrels. Inventories increased by 0.86 million barrels vs. the five year average. Total inventories stand at 702.2 million barrels, down from 704.4 million barrels at the end of the previous week. The five year average inventory is 718.0 million barrels, down from 721.1 million barrels at the end of the previous week.
Current inventories are 2.21% lower than the five year average up from -2.32% 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 August 8th.
Below is the chart of current inventory vs. the five year average as of August 8th.
As of August 12th, the net speculative long position in petroleum futures was 238,627,000 barrels down 8,316,000 barrels (-3.37%) from the previous week. Speculation decreased for the seventh consecutive week and represents 33.98% of domestic inventories. Speculation is 32.96% below its one year moving average. The corresponding spot month diesel futures price on August 12th was 284.50 cents per gallon, down 0.19 cents from 284.69 cents per gallon during the previous week.
Diesel fuel speculative levels are negative (net short) for the fourth consecutive week.
Diesel fuel price and size of speculative net long position in petroleum are 29.57% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 8.74% 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 283.97 cents per gallon or 0.52 cents per gallon less than current prices. The analysis would indicate that about 0.17% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about two cents lower on the week.
The net speculative long position has been variable over the past year ranging between 238 million and 453 million barrels with an average of about 356 million barrels, which is down about 3 million barrels on the week.
The graph below is three year history of speculative position levels as of August 12th.
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.