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Prices Higher - Dollar Higher - Speculation at 16-Month Low - Production Up
During the week ending August 29th, the spot month diesel futures price increased by 2.90 cents per gallon (+1.03%) while the deferred months changed by up 3 to down 2 cents per gallon making the forward pricing curve steady and more negatively sloped. The one year forward price ended the week at a 2.18 cent discount to the spot price, from a premium of 0.66 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 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 August 29th.
During the week ending August 29th, the spot month gasoline futures price increased by 4.43 cents per gallon (+1.62%) while the deferred months increased by 0 to 4 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 12.28 cent discount to the spot price, from a discount of 9.05 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand.
Below is a one week chart of the gasoline forward pricing curve as of August 29th.
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 13.43% year over year.
Weekly US petroleum demand decreased by 3.53% during the week ending August 22nd. Domestic demand is up 2.15% vs. one-year ago and demand is currently 2.35% over the five year average.
The attractiveness of making new hedges decreased on the week as prices were higher while 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 22nd.
Below is a chart of average vs. five-year demand as of August 22nd.
Below is the one-year chart of spot diesel futures prices as of August 29th.
Below is the one-year chart of spot gasoline futures prices as of August 29th.
: : Inventories decreasing by 1.78 million barrels while inventories were expected to decrease by 5.40 million barrels on the week. The five-year-average inventory increased by 1.68 million barrels. Inventories decreased vs. the five year average and increased vs. expectations.
: : US second quarter GDP was revised upward indicating unexpected strength in the domestic economy which is supportive of economic growth expectations, petroleum demand expectations, and price. However, if the US economy is relatively stronger than other economies, the dollar will strengthen which is negative for petroleum prices in dollar terms.
: : Stock market increasing by 0.75% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.50% 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 22nd, total petroleum inventories decreased by 1.78 million barrels vs. a five year average increase of 1.68 million barrels and vs. an expected decrease of 5.40 million barrels. Inventories decreased by 3.46 million barrels vs. the five year average. Total inventories stand at 695.6 million barrels, down from 697.4 million barrels at the end of the previous week. The five year average inventory is 719.4 million barrels, up from 717.7 million barrels at the end of the previous week.
Current inventories are 3.31% lower than the five year average down from -2.83% at the end of the previous week. Inventory levels continue to remain close to the five year average but are at one year low levels versus the historical level.
Below is the chart of current inventory as a percentage of the five year average as of August 22nd.
Below is the chart of current inventory vs. the five year average as of August 22nd.
As of August 26th, the net speculative long position in petroleum futures was 196,652,000 barrels down 12,540,000 barrels (-5.99%) from the previous week. Speculation decreased for the ninth consecutive week and represents 28.27% of domestic inventories. Speculation is 43.51% below its one year moving average. The corresponding spot month diesel futures price on August 26th was 284.42 cents per gallon, up 2.71 cents from 281.71 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 35.78% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 12.80% 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 281.80 cents per gallon or 2.62 cents per gallon less than current prices. The analysis would indicate that about 0.86% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about unchanged on the week.
The net speculative long position has been variable over the past year ranging between 196 million and 453 million barrels with an average of about 348 million barrels, which is down about 4 million barrels on the week.
The graph below is three year history of speculative position levels as of August 26th.
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.