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Prices Lower - Rig Count Lower - Speculation Lower - Production Lower - Stock Market Lower - Inventory Higher - Dollar Lower
During the week ending October 4th, the spot month diesel futures price decreased by 4.15 cents per gallon (-2.14%) while the deferred months decreased by 2 to 6 cents per gallon making the forward pricing curve lower and more negatively sloped. The one year forward price ended the week at a 10.46 cent discount to the spot price, from a discount of 10.08 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 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.
During the week ending October 4th, the spot month gasoline futures price decreased by 3.31 cents per gallon (-2.06%) while the deferred months decreased by 2 to 5 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 13.64 cent discount to the spot price, from a discount of 14.02 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was lower on the week.
Weekly US petroleum demand decreased by 2.03% during the week ending September 27th. Domestic demand is up by 2.15% vs. one-year ago and demand is currently 6.56% above the five year average.
Domestic production was lower for the week ending September 27th at 12.4 million barrels per day after re-hitting the record of 12.5 million barrels per day during the previous week. Domestic production is 11.71% above year ago levels. The number of operating oil drilling rigs in the US decreased by 3 from 713 to 710 on the week making a new 29 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 October 4th.
Below is the one-year chart of spot gasoline futures prices as of October 4th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 0.46 million barrels while inventories were expected to decrease by 0.43 million barrels on the week. The five-year average inventory increased by 0.54 million barrels. Inventories increased vs. expectations and decreased vs. the five year average.
: : The price effects of the attack on Saudi Arabia are gone and prices have returned to pre-attack levels as Saudi Arabia has restored the production taken off-line by the attack.
: : The US/China trade dispute has resumed its role as the primary driver of petroleum prices. This dispute continues to weigh on prices as the prospect for a “grand bargain” any time soon seems to be fading. Continued trade dispute would dampen economic growth expectations and petroleum demand growth expectations.
: : The Stock market decreased by -0.33% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.30% 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 – down 1,590,000 barrels per day in September due to attack. This low level of OPEC production continues to be supportive of price. OPEC production is at the lowest level since March 2009 but is expected to recover as Saudi Arabia comes back on-line.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of October 2019. The chart shows the expectation of a slightly surplus market over the next four quarters. This forecast indicates roughly the same expected surplus over the next year as the August report indicated. This is neutral for price.
Below is the one-year chart of the US stock market as of October 4th
Below is the one-year chart of the US stock market as of October 4th
During the week ended September 27th, total petroleum inventories increased by 0.46 million barrels vs. a five year average increase of 0.54 million barrels and vs. an expected decrease of 0.43 million barrels. Inventories decreased by 0.08 million barrels vs. the five year average and increased by 0.89 million barrels vs. expectations. Total inventories stand at 783.9 million barrels, up from 783.4 million barrels at the end of the previous week. The five year average inventory is 784.0 million barrels, up from 783.5 million barrels at the end of the previous week.
Current inventories are -0.02% versus the five year average, a decrease on the week from -0.01%.
As of October 1st, the net speculative long position in petroleum futures was 198,344,000 barrels, down 73,480,000 barrels (-27.03%) from the previous week. Speculation decreased for the second week and represents 25.30% of domestic inventories. Speculation is 24.92% below its one year moving average. The corresponding spot month diesel futures price on October 1st was 189.85 cents per gallon, down 6.91 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 72.58% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 52.68% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation decreased 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 444 million barrels with an average of about 264 million barrels, which is down 5 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.