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Prices Down - Speculation Up - Domestic Production Down
During the week ending September 11th, the spot month diesel futures price decreased by 4.60 cents per gallon (-2.88%) while the deferred months decreased by 1 to 4 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 13.56 cent premium to the spot price, from a premium of 11.44 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 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 September 11th, the spot month gasoline futures price decreased by 4.83 cents per gallon (-3.41%) while the deferred months decreased by 2 to 4 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 6.08 cent discount to the spot price, from a discount of 4.29 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 decreased on the week which is positive for price. Inventories on the week were higher and higher than expectations which is negative for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was higher on the week which is positive for price. US domestic crude production was lower which is positive for price. Domestic production is up 6.34% year over year down from +11.97% year over year on July 31st.
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 2.26% during the week ending September 4th. Domestic demand is up 4.18% vs. one-year ago and demand is currently 6.40% over the five year average.
Domestic production decreased for the fifth week in a row. The number of operating oil drilling rigs in the US decreased for the second week in a row indicating that the long decline in domestic drilling activity is most likely over and that we have entered a period of variable rig counts in a normal range. This is positive for price. Rig count decreased by 10 and the previous week's decrease was 13. The effect of rig count on the market will be muted moving forward as most of the idling of rigs has occurred. When rig count picks up, this will be indicative of an increase in supply 12-18 months forward.
OPEC production is up 5.88% year over year at near record levels. The imbalance in supply and demand is expected to last longer that was first thought and into 2016 and beyond. 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 September 11th.
Below is the one-year chart of spot gasoline futures prices as of September 11th.
: : Inventories increased by 3.91 million barrels while inventories were expected to increase by 1.50 million barrels on the week. The five-year average inventory increased by 1.05 million barrels. Inventories increased vs. the five year average and 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
: : Concerns about Chinese domestic demand for petroleum arose when China August imports decreased by 13.8% year over year when a decline of 7.9% year over year was expected. This shows that the Chinese economy is cooling and the rate of Chinese petroleum imports is falling. This lowers global petroleum demand expectations and is negative for price.
: : Goldman Sachs issued a report saying that the price of crude oil may have to fall to $20 per barrel in order to clear the market by increasing demand and curtailing supply especially the shale producers in the US.
: : Stock market increasing by +2.07% on the week is generally positive for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -1.08% 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 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 September 11th.
Below is the one-year chart for the US dollar index as of September 11th.
During the week ended September 4th, total petroleum inventories increased by 3.91 million barrels vs. a five year average increase of 1.05 million barrels and vs. an expected increase of 1.50 million barrels. Inventories increased by 2.86 million barrels vs. the five year average and 2.41 million barrels vs. expectations. Total inventories stand at 823.4 million barrels, up from 819.5 million barrels at the end of the previous week. The five year average inventory is 713.1 million barrels, up from 712.1 million barrels at the end of the previous week.
Current inventories are 15.47% higher than the five year average, up from +15.09 at the end of the previous week.
As of September 8th, the net speculative long position in petroleum futures was 123,784,000 barrels, up 20,221,000 barrels (+19.53%) from the previous week. Speculation increased for the third week in a row and represents 15.03% of domestic inventories. Speculation is 36.61% below its one year moving average. The corresponding spot month diesel futures price on September 8th was 159.38 cents per gallon, up 1.59 cents from 157.79 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 21.90 correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 4.79% of diesel fuel price movements are explained by changes in level of speculation. 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 78 million and 285 million barrels with an average of about 195 million barrels, which is down about 2 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.