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Prices Steady - Domestic Production to 28.5 Year High
During the week ending September 19th, the spot month diesel futures price decreased by 2.39 cents per gallon (-0.87%) while the deferred months changed between down 3 and up 2 cent per gallon making the forward pricing curve steady and positively sloped over the next 12 months. The one year forward price ended the week at a 5.07 cent premium to the spot price, from a premium of 2.68 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 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.
Below is a one week chart of the diesel forward pricing curve as of September 19th.
During the week ending September 19th, the spot month gasoline futures price increased by 9.26 cents per gallon (+3.68%) while the deferred months increased by 1 to 6 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 13.67 cent discount to the spot price, from a discount of 6.50 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 September 19th.
The US dollar was higher on the week which is negative for price. Inventories on the week were higher 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 higher on the week which is negative for price. Domestic production is up 12.92% year over year to a fresh 28.5 year high level.
Weekly US petroleum demand increased by 6.20% during the week ending September 12th. Domestic demand is up 1.23% vs. one-year ago and demand is currently 1.49% over the five year average.
The attractiveness of making new hedges was neutral on the week as prices were steady and speculation was only marginally higher. 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 September 12th.
Below is a chart of average vs. five-year demand as of September 12th.
Below is the one-year chart of spot diesel futures prices as of September 19th.
Below is the one-year chart of spot gasoline futures prices as of September 19th.
: : Inventories increasing by 2.32 million barrels while inventories were expected to decrease by 0.71 million barrels on the week. The five-year-average inventory increased by 1.79 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : OPEC hinting that it may decrease production in 2015 by 500,000 barrels per day to 29.5 million barrels per day in response to increased supply from other sources and in order to support price. This is negative for supply and supportive of price.
: : The Federal Reserve pledging that it would keep interest rates low for a "considerable time" after the end of the QE3 program which is the buying longer-dated treasury securities the volume of which has been tapering and will eventually go to zero. This is positive for the US economy and petroleum demand expectations and price.
: : Domestic production surged by 2.6% week over week to the highest levels in 28.5 years. This increased supply is negative for price and also negative for the risk of geopolitical events causing price spikes.
: : Chinese August industrial production increased at its slowest pace in over five years. This indicates slowing in the Chinese economy in general which is negative for global petroleum demand expectations and price. China is where the market expects a significant portion of the petroleum demand growth moving forward. If China's economy is growing slower than expectations, this is particularly negative for petroleum prices.
: : Domestic economic factors including:
: : Stock market increasing by 1.25% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 0.59% 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 September 12th, total petroleum inventories increased by 2.32 million barrels vs. a five year average increase of 1.79 million barrels and vs. an expected decrease of 0.71 million barrels. Inventories increased by 0.53 million barrels vs. the five year average. Total inventories stand at 700.8 million barrels, up from 698.5 million barrels at the end of the previous week. The five year average inventory is 716.9 million barrels, up from 715.1 million barrels at the end of the previous week.
Current inventories are 2.24% lower than the five year average, up from -2.32% 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 September 12th.
Below is the chart of current inventory vs. the five year average as of September 12th.
As of September 16th, the net speculative long position in petroleum futures was 190,535,000 barrels up 6,944,000 barrels (+3.78%) from the previous week. Speculation increased for the second week in a row and represents 27.19% of domestic inventories. Speculation is 43.37% below its one year moving average. The corresponding spot month diesel futures price on September 16th was 275.63 cents per gallon, down 3.52 cents from 279.15 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 48.17% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 23.20% 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 276.90 cents per gallon or 1.27 cents per gallon more than current prices. The analysis would indicate that about -0.46% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about two cents 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 336 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 16th.
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.