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Prices Mostly Higher - Rig Count Lower - Speculation Higher - Production Steady - Stock Market Lower - Inventory Higher - Dollar Lower
During the week ending August 23rd, the spot month diesel futures price increased by 0.28 cents per gallon (+0.15%) while the deferred months changed by +1 cent to -1 cent per gallon making the forward pricing curve virtually unchanged in level and slope. The one year forward price ended the week at a 2.14 cent discount to the spot price, from a discount of 2.50 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates steady demand expectations and higher inventories with respect to demand. Demand also includes speculation 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 23rd, the spot month gasoline futures price decreased by 1.40 cents per gallon (-0.85%) while the deferred months increased by 0 to 2 cents per gallon making the forward pricing curve mostly higher and less negatively sloped. The one year forward price ended the week at a 4.88 cent discount to the spot price, from a discount of 7.84 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates steady demand expectations and slightly higher inventory levels with respect to supply and demand. Demand also includes speculation which was slightly higher on the week.
Weekly US petroleum demand decreased by 4.94% during the week ending August 16th. Domestic demand is up by 3.14% vs. one-year ago and demand is currently 3.05% above the five year average.
Domestic production was unchanged for the week ending August 16th at 12.3 million barrels per day. Domestic production is 11.82% above year ago levels. The number of operating oil drilling rigs in the US decreased by 16 from 770 to 754 on the week making a new near-term low and the lowest level since January 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 3,872,000 barrels per day (+45.94%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of August 23rd.
Below is the one-year chart of spot gasoline futures prices as of August 23rd.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased for the first time in two weeks by 0.19 million barrels while inventories were expected to decrease by 1.51 million barrels on the week. The five-year average inventory decreased by 1.76 million barrels. Inventories increased vs. expectations and vs. the five year average.
: : The US/China trade dispute continues to be center stage in driving the price movement of oil markets. On Friday, China retaliated against the latest moves from the US by raising tariffs on crude oil arriving from the US to China. This is negative for price. Subsequently, China announced that trade talks will resume and oil rose on that news.
: : The oil market was watching the annual meeting of economic experts in Jackson Hole, Wyoming. Fed Chair Jerome Powell was closely watched for clues of the likelihood of a rate cut at the next Fed FOMC meeting in September. If there is a rate cut, this would stimulate the economy which would increase petroleum demand growth expectations and petroleum prices.
: : The Stock market decreased by -1.44% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.51% on the week which is positive 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 July. 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.
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.
Below is the one-year chart of the US stock market as of August 23rd.
Below is the one-year chart of the US stock market as of August 23rd.
During the week ended August 16th, total petroleum inventories increased by 0.19 million barrels vs. a five year average decrease of 1.76 million barrels and vs. an expected decrease of 1.51 million barrels. Inventories increased by 1.95 million barrels vs. the five year average and increased by 1.70 million barrels vs. expectations. Total inventories stand at 810.0 million barrels, up from 809.8 million barrels at the end of the previous week. The five year average inventory is 788.3 million barrels, down from 790.0 million barrels at the end of the previous week.
Current inventories are +2.75% versus the five year average, an increase on the week from +2.50%.
As of August 20th, the net speculative long position in petroleum futures was 272,960,000 barrels, up 2,895,000 barrels (+1.07%) from the previous week. Speculation increased for the first time in two weeks and represents 33.70% of domestic inventories. Speculation is 6.54% below its one year moving average. The corresponding spot month diesel futures price on August 20th was 185.43 cents per gallon, down 2.30 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 81.33% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 66.15% 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 511 million barrels with an average of about 292 million barrels, which is down 5 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.