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Prices Steady to Lower - US Production Higher - Inventory Down
During the week ending September 23rd, the spot month diesel futures price increased by 0.22 cents per gallon (+0.16%) while the deferred months increased by 0 to 1 cent per gallon making the forward pricing curve virtually unchanged in slope and level. The one year forward price ended the week at a 10.81 cent premium to the spot price, from a premium of 10.42 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates steady demand expectations and steady inventories with respect to demand. Demand includes speculative demand which decreased 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 23rd, the spot month gasoline futures price decreased by 8.47 cents per gallon (-5.80%) while the deferred months changed by +1 to -3 cents per gallon making the forward pricing curve virtually unchanged in slope and level except for the spot month. The one year forward price ended the week at a 0.61 cent premium to the spot price, from a discount of 8.53 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates steady demand expectations and steady inventory levels with respect to supply and demand. Demand includes speculative demand which was lower on the week.
The US dollar was lower on the week which is positive 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 higher which is negative for price. Domestic production is down 6.83% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was higher on the week which is negative for price.
Weekly US petroleum demand decreased by 3.91% during the week ending September 16th. Domestic demand is up 3.03% vs. one-year ago and demand is currently 5.07% above the five year average.
Domestic production increased for the second week after reaching a three week low. Current production is 6.83% below year ago levels. The number of operating oil drilling rigs in the US increased or were flat for the thirteenth week in a row and the 17th time in 19 weeks and stands at 418 which is 2 more than the previous week, 102 more than the recent low of 316 and 74.02% lower than the peak of 1609 in October 2014. A higher rig count is negative for price. The generally lower rig count is causing US production to move downward as part of the global rebalancing of supply and demand. US domestic production has decreased by 707,000 barrels per day since the beginning of the year and 1,098,000 barrels per day since the peak of 9.61 million barrels per day in June 2015.
Below is the one-year chart of spot diesel futures prices as of September 23rd.
Below is the one-year chart of spot gasoline futures prices as of September 23rd.
MARKET FACTORS & COMMENTARY:
: : Inventories decreased by 7.17 million barrels while inventories were expected to increase by 2.10 million barrels on the week. The five-year average inventory decreased by 0.90 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : Nigeria is increasing its production after months of decreased production due to unrest and militant attacks on oil infrastructure. Nigeria's production rose to 1.75 million barrels per day from 1.44 las month an increase of 310,000 barrels per day. Nigeria is expected to continue its increase back to normal levels of around 2 million barrels per day. This development brings more oil onto the market and is negative for price.
: : OPEC as a whole had record high output for the third month in a row in August to 33,690,000 barrels per day. This is an increase of 1.529 million barrels per day in the last 12 months alone and is the main explanation of why the supply continues to exceed demand despite lower US production and increased demand. Saudi Arabia had record high exports in July. Of course, these things are negative for price in the short-term but may be positive for price in the longer term as further increases in production may not be able to keep up with demand increases at current price levels.
: : There is a low likelihood that any supply ceiling would be set much less adhered to at the upcoming meeting of oil ministers in Algiers. The persistent rivalry between Saudi Arabia and Iran almost assures that no agreement will be struck.
: : While decreasing in the US in recent months, oil inventories continue to grow globally as more crude oil is pumped out of the ground on a daily basis than is consumed. Low prices will continue to encourage demand and discourage new supply. It appears that OPEC is continuing to keep the market oversupplied to hasten demand growth while keeping prices low and making exploration and production, especially in the US, a bad investment for now. Demand may increase and surpass production and the ability to increased production in the short-term which would cause prices to spike. Should this happen, how quickly will US shale producers be able to increase production, at what marginal cost per barrel, and in what quantities. Given the volatility in the level of speculative position, there is an extraordinary amount of uncertainty in the oil market currently.
: : The Stock market increasing by 1.20% which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -0.66% on the week 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.
The charts below show supply and demand history and expectations for August and September. Supply and demand are in the process of re-balancing which is the main cause of steady to higher price levels over the past 6 months. The August and September forecasts indicate that the rebalancing of supply and demand globally will occur in 2017 which would be supportive of price. Of course, these projections are subject to many factors and constantly changing market conditions. The rebalancing of the market will most likely not return prices to the levels of two years ago. Significant price increase will be the result of a significant increase in demand.
Below is the one-year chart US stock market prices as of September 23rd.
Below is the one-year chart for the US dollar index as of September 23rd.
During the week ended September 23rd, total petroleum inventories increased by 7.17 million barrels vs. a five year average decrease of 0.90 million barrels and vs. an expected increase of 2.10 million barrels. Inventories decreased by 6.23 million barrels vs. the five year average and decreased by 9.27 million barrels vs. expectations. Total inventories stand at 894.7 million barrels, down from 901.9 million barrels at the end of the previous week. The five year average inventory is 725.8 million barrels, down from 726.7 million barrels at the end of the previous week.
Current inventories are 23.27% higher than the five year average, down from +24.11% at the end of the previous week.
As of September 20th, the net speculative long position in petroleum futures was 167,148,000 barrels, down 61,339,000 barrels (-26.85%) from the previous week. Speculation decreased for the first time in two weeks and represents 18.68% of domestic inventories. Speculation is 0.04% below its one year moving average. The corresponding spot month diesel futures price on September 20th was 140.50 cents per gallon, down 1.79 cents from 142.29 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 50.34% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 25.34% of diesel fuel price movements are explained by changes in level of speculation.
The net speculative long position has been variable over the past year ranging between 57 million and 282 million barrels with an average of about 167 million barrels, which is up about 1 million barrels on the week.
Based on a multiple regression analysis considering the level of the dollar, speculation, and inventory over the past five years as of September 20th, the market price for spot month diesel futures is estimated to be 141.07 versus the actual price of 140.50. This indicates that the market is currently undervalued by 0.57 cents per gallon given the assumptions of the pricing model.