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Prices Lower - Dollar Up - Domestic Production New High - Speculation Down
During the week ending September 26th, the spot month diesel futures price decreased by 1.61 cents per gallon (-0.59%) while the deferred months were lower by 2-3 cents per gallon making the forward pricing curve lower and positively sloped over the next 12 months. The one year forward price ended the week at a 5.05 cent premium to the spot price, from a premium of 5.07 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 steady supplies with respect to demand. Demand includes speculative demand which was lower 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 26th.
During the week ending September 26th, the spot month gasoline futures price increased by 5.05 cents per gallon (+1.93%) while the deferred months decreased by 3 to 5 cents per gallon making the forward pricing curve mostly lower and mostly unchanged in slope. The one year forward price ended the week at a 22.34 cent discount to the spot price, from a discount of 13.76 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher immediate demand expectations and steady inventory levels with respect to supply and demand.
Below is a one week chart of the gasoline forward pricing curve as of September 26th.
The US dollar was higher on the week which is negative for price. Inventories on the week were lower which is positive for price. The stock market, as a proxy for demand expectations, was lower which is negative for price. Speculation was lower on the week which is negative for price. US domestic crude production was higher on the week which is negative for price. Domestic production is up 14.02% year over year to a fresh 28.5 year high level.
Weekly US petroleum demand decreased by 2.90% during the week ending September 19th. Domestic demand is up 1.47% vs. one-year ago and demand is currently 2.75% over the five year average.
The attractiveness of making new hedges increased on the week as prices were generally lower and speculation was lower as well. 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 19th.
Below is a chart of average vs. five-year demand as of September 19th.
Below is the one-year chart of spot diesel futures prices as of September 26th.
Below is the one-year chart of spot gasoline futures prices as of September 26th.
: : Inventories decreasing by 3.86 million barrels while inventories were expected to decrease by 3.40 million barrels on the week. The five-year-average inventory decreased by 0.35 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : China's Finance Minister indicated that China's economic growth faces downward pressure which would be negative for petroleum demand growth expectations and price. These concerns abated slightly when Chinese HSBC manufacturing purchasing managers' index increased unexpectedly. While the Chinese economy will most likely see growth lower than expectations, it is not collapsing and it will be helped by lower oil prices.
: : The uptick in geopolitical activity with the commencement of bombing ISIS exerted some upward pressure on price due to the increased risk of supply disruption in the region. The bigger news is what the petroleum market is not doing. In the past, any fighting in the Middle East meant a petroleum price spike. The lack of such a spike underscores how the market has changed in terms of the increase in non-middle east production (e.g. North Dakota) and the ample spare capacity that Saudi Arabia has that can quickly cover any supply disruption from other countries due to war. The larger news is that markets work. While the average price for petroleum over the past three years has been the highest three year average in history, the high prices have increased supply away from the Middle East leaving a much more stable global petroleum market that is less dependent on the Middle East.
: : US August new home sales rose to a 6.25 year high level. This shows strength in the housing market which drives other significant economic activity. This positive for petroleum demand expectations and price.
: : US second quarter GDP growth was revised upward to a 4.6% annual rate. This is a healthy rate of growth that, if sustained, would support petroleum demand growth expectations and price.
: : Stock market decreasing by 1.37% on the week which is negative for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 1.07% 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 19th, total petroleum inventories decreased by 3.86 million barrels vs. a five year average decrease of 0.35 million barrels and vs. an expected decrease of 3.40 million barrels. Inventories decreased by 3.51 million barrels vs. the five year average. Total inventories stand at 696.9 million barrels, down from 700.8 million barrels at the end of the previous week. The five year average inventory is 716.5 million barrels, down from 716.9 million barrels at the end of the previous week.
Current inventories are 2.74% lower than the five year average, down from -2.24% 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 19th.
Below is the chart of current inventory vs. the five year average as of September 19th.
As of September 23rd, the net speculative long position in petroleum futures was 178,918,000 barrels down 11,617,000 barrels (-6.10%) from the previous week. Speculation decreased for the first time in three weeks and represents 25.67% of domestic inventories. Speculation is 46.33% below its one year moving average. The corresponding spot month diesel futures price on September 23rd was 268.32 cents per gallon, down 7.31 cents from 275.63 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 50.06% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 28.15% 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 273.85 cents per gallon or 5.53 cents per gallon more than current prices. The analysis would indicate that about -2.01% of current price is attributable to speculation and its underlying market rationale. The "would be" price was about three 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 333 million barrels, which is down about 3 million barrels on the week.
The graph below is three year history of speculative position levels as of September 23rd.
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.