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Prices Lower - Dollar Higher - Speculation at 26-Month Low
During the week ending September 5th, the spot month diesel futures price decreased by 4.09 cents per gallon (-1.43%) while the deferred months were down 0 to 2 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 0.60 cent discount to the spot price, from a discount of 2.42 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 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 September 5th.
During the week ending September 5th, the spot month gasoline futures price decreased by 3.95 cents per gallon (-1.51%) while the deferred months decreased by 2 to 6 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 9.60 cent discount to the spot price, from a discount of 12.28 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 September 5th.
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 steady which is neutral for price. Domestic production is up 13.24% year over year.
Weekly US petroleum demand increased by 4.02% during the week ending August 29th. Domestic demand is up 2.69% vs. one-year ago and demand is currently 1.88% over the five year average.
The attractiveness of making new hedges increased on the week as prices and speculation were both lower. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging may become more attractive.
Below is a chart of three-year domestic crude production as of August 29th.
Below is a chart of average vs. five-year demand as of August 29th.
Below is the one-year chart of spot diesel futures prices as of September 5th.
Below is the one-year chart of spot gasoline futures prices as of September 5th.
: : Inventories decreasing by 2.62 million barrels while inventories were expected to decrease by 2.67 million barrels on the week. The five-year-average inventory decreased by 3.85 million barrels. Inventories increased vs. the five year average and increased vs. expectations.
: : OPEC production rose to a one-year high level of 31.033 million barrels per day. This is negative for price especially in light of surging US domestic supply and relatively weak global demand.
: : Reduced tensions in Ukraine and the agreement of a cease-fire were supportive of price. The reduced tensions will perhaps lessen sanctions for Russia and be positive for Russian and global economies which translates into higher petroleum demand and price.
: : US economic reports including:
: : Global economic reports including:
: : Stock market increasing by 0.23% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 1.18% 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 29th, total petroleum inventories decreased by 2.62 million barrels vs. a five year average decrease of 3.85 million barrels and vs. an expected decrease of 2.67 million barrels. Inventories increased by 1.23 million barrels vs. the five year average. Total inventories stand at 693.0 million barrels, down from 695.6 million barrels at the end of the previous week. The five year average inventory is 715.5 million barrels, down from 719.4 million barrels at the end of the previous week.
Current inventories are 3.15%lower than the five year average, up from -3.31% 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 29th.
Below is the chart of current inventory vs. the five year average as of August 29th.
As of September 2nd, the net speculative long position in petroleum futures was 172,478,000 barrels down 24,174,000 barrels (-12.29%) from the previous week. Speculation decreased for the 10th consecutive week and represents 24.89% of domestic inventories. Speculation is 49.80% below its one year moving average. The corresponding spot month diesel futures price on September 2nd was 279.67 cents per gallon, down 4.75 cents from 284.42 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 39.74% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 15.79% 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 280.63 cents per gallon or 0.96 cents per gallon more than current prices. The analysis would indicate that about -0.32% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about a penny lower on the week.
The net speculative long position has been variable over the past year ranging between 172 million and 453 million barrels with an average of about 344 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 September 2nd.
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.