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Prices Lower - Rig Count Lower - Speculation Higher - Production Unchanged - Stock Market Higher - Inventory Lower - Dollar Lower
The attack on Saudi Arabian oil facilities on Saturday 9/14 has sent prices higher as Saudi Arabian production is lower. Questions are: how soon will SA be back to full production and what other producers will increase production to fill the gap.
During the week ending September 13th, the spot month diesel futures price decreased by 2.25 cents per gallon (-1.18%) while the deferred months decreased by 1 to 2 cents per gallon making the forward pricing curve lower and more negatively sloped. The one year forward price ended the week at a 5.84 cent discount to the spot price, from a discount of 4.92 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and lower inventories with respect to demand. Demand also includes speculation 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 13th, the spot month gasoline futures price decreased by 2.11 cents per gallon (-1.34%) while the deferred months decreased by 1 to 3 cents per gallon making the forward pricing curve lower and more negatively sloped. The one year forward price ended the week at a 6.75 cent discount to the spot price, from a discount of 5.83 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates lower demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.
Weekly US petroleum demand decreased by 0.84% during the week ending September 6th. Domestic demand is up by 0.40% vs. one-year ago and demand is currently 7.84% above the five year average.
Domestic production was steady for the week ending September 6th at 12.4 million barrels per day. Domestic production is 13.76% above year ago levels. The number of operating oil drilling rigs in the US decreased by 5 from 738 to 733 on the week making a new near-term low and the lowest level since November 2017. 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 being brought into service since the number of DUC’s has been declining slightly. US domestic production has increased by 3,972,000 barrels per day (+47.13%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of September 13th.
Below is the one-year chart of spot gasoline futures prices as of September 13th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories decreased for the week by 4.89 million barrels while inventories were expected to decrease by 4.02 million barrels on the week. The five-year average inventory increased by 1.42 million barrels. Inventories decreased vs. expectations and vs. the five year average.
: : Saudi Arabia was attacked over the weekend. This attack will remove 5.7 million barrels per day of Saudi Arabian production for about three weeks according to reports. This amounts to roughly 120 million barrels of lost production over the time period which is about 15% of total global crude inventories. This event added 20 cents to gasoline and diesel on Monday morning. Price will follow how quickly Saudi Arabia can repair the damage and how other producers increase production if at all.
: : The US/China trade dispute continues to weigh on prices but there have been no new developments on this issue in the past week.
: : All conversations regarding how OPEC + Friends will curtail supply and how there is an impending oversupply are essentially moot until Saudi Arabia gets back to full production.
: : The Stock market increased by +0.96% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.14% 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 – Up 200,000 barrels per day in August. This low level of OPEC production continues to be supportive of price. OPEC production remaining near the five year low cedes market share to US shale producers. This may also indicate OPEC’s limited ability to cut additional supplies.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of September 2019. The chart shows the expectation of a slightly surplus market over the next four quarters. This forecast indicates more surplus over the next year than the August report. This is negative for price.
Below is the one-year chart of the US stock market as of September 13th
Below is the one-year chart of the US stock market as of September 13th
During the week ended September 6th, total petroleum inventories decreased by 4.89 million barrels vs. a five year average increase of 1.42 million barrels and vs. an expected decrease of 4.02 million barrels. Inventories decreased by 6.31 million barrels vs. the five year average and decreased by 0.87 million barrels vs. expectations. Total inventories stand at 781.2 million barrels, down from 786.1 million barrels at the end of the previous week. The five year average inventory is 787.7 million barrels, up from 786.3 million barrels at the end of the previous week.
Current inventories are -0.83% versus the five year average, a decrease on the week from -0.03%.
As of September 10th, the net speculative long position in petroleum futures was 257,754,000 barrels, up 51,190,000 barrels (+24.78%) from the previous week. Speculation decreased for the second week and represents 32.99% of domestic inventories. Speculation is 6.98% below its one year moving average. The corresponding spot month diesel futures price on September 10th was 193.12 cents per gallon, up 12.79 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 79.38% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 63.01% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation decreased slightly from the previous week.
The net speculative long position has been variable over the past year ranging between 134 million and 480 million barrels with an average of about 277 million barrels, which is down 4 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.