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Petroleum Market Commentary - September 23, 2019

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Prices Higher - Rig Count Lower - Speculation Higher - Production Unchanged - Stock Market Lower - Inventory Higher - Dollar Higher

DIESEL:

During the week ending September 20th, the spot month diesel futures price increased by 10.85 cents per gallon (+5.78%) while the deferred months increased by 2 to 11 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at an 11.20 cent discount to the spot price, from a discount of 5.84 cents at the end of the previous week.

The level and slope of the diesel forward pricing curve indicates higher 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.

GASOLINE:

During the week ending September 20th, the spot month gasoline futures price increased by 12.53 cents per gallon (+8.07%) while the deferred months increased by 2 to 12 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 14.34 cent discount to the spot price, from a discount of 6.75 cents and the end of the previous week.

The change in level and shape of the forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.

ANALYSIS:

DEMAND:

Weekly US petroleum demand decreased by 5.49% during the week ending September 13th. Domestic demand is up by 0.03% vs. one-year ago and demand is currently 6.82% above the five year average.

PRODUCTION:

Domestic production was steady for the week ending September 13th at 12.4 million barrels per day. Domestic production is 12.72% above year ago levels. The number of operating oil drilling rigs in the US decreased by 14 from 733 to 719 on the week making a new 28 month low. 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 – essentially harvesting investment that has already been made. 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 20th.



Below is the one-year chart of spot gasoline futures prices as of September 20th.

MARKET FACTORS & COMMENTARY:

: :  Petroleum inventories increased on the week by 2.28 million barrels while inventories were expected to decrease by 4.06 million barrels on the week. The five-year average inventory decreased by 3.96 million barrels. Inventories increased vs. expectations and vs. the five year average.

: :  Saudi Arabia was attacked on September 14th which drove prices higher on increased geopolitical risk. Saudi Arabia has said that it will take them until the end of September in order to restore the 5.7 million barrels per day of Saudi production that was lost due to the damage to oil infrastructure sustained from the attack. Prices remain elevated due to this short-term deficit in supply.

: :  The US/China trade dispute continues to weigh on prices but there have been no new developments on this issue in the past week.

: :  The Stock market decreased by -0.51% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.

: :  The US Dollar increased by +0.26% 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 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.

SEPTEMBER FORECAST



Below is the one-year chart of the US stock market as of September 20th



Below is the one-year chart of the US stock market as of September 20th



INVENTORIES:

During the week ended September 13th, total petroleum inventories increased by 2.28 million barrels vs. a five year average decrease of 3.97 million barrels and vs. an expected decrease of 4.06 million barrels. Inventories increased by 6.24 million barrels vs. the five year average and increased by 6.32 million barrels vs. expectations. Total inventories stand at 783.5 million barrels, up from 781.2 million barrels at the end of the previous week. The five year average inventory is 783.8 million barrels, down from 787.7 million barrels at the end of the previous week.

Current inventories are -0.04% versus the five year average, an increase on the week from -0.83%.



SPECULATION:

As of September 17th, the net speculative long position in petroleum futures was 282,688,000 barrels, up 24,934,000 barrels (+9.67%) from the previous week. Speculation increased for the second week and represents 36.08% of domestic inventories. Speculation is 3.33% above its one year moving average. The corresponding spot month diesel futures price on September 17th was 198.96 cents per gallon, up 5.84 cents per gallon from the prior week.

Diesel fuel price and size of speculative net long position in petroleum are 78.33% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 61.36% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation decreased slightly from the previous week and has been decreasing over the past several months.

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 274 million barrels, which is down 3 million barrels on the week.



CONTACT:

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.