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Prices Higher - Inventory Higher - Speculation Steady
During the week ending October 11th, the spot month diesel futures price increased by 3.59 cents per gallon (+1.20%) while the deferred months increased by 2 to 5cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 9.87 cent (3.25%) discount to the spot price, from a discount of 10.43 cents (3.48%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates slightly higher demand expectations and slightly lower supplies with respect to demand. Demand includes speculative demand. 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 11th, the spot month gasoline futures price increased by 6.05 cents per gallon (+2.32%) while the deferred months increased by 5 to 7 cents per gallon. This made the forward pricing curve higher and virtually unchanged in sloped. The one year forward price ended the week at a 11.91 cent (4.67%) discount to the spot price, from a discount of 12.13 cents (4.88%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates slightly higher demand expectations and unchanged inventory levels with respect to supply and demand.
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 steady on the week which is neutral for price. US domestic crude production continues to be strong and increased on the week which is negative for price.
Weekly US petroleum demand increased by 1.94% during the week ending October 4th. Demand is up 3.66% vs. one year ago and demand is currently 3.25% above the five year average.
The attractiveness of making new hedges decreased on the week as prices increased and with an unchanged level of speculation. As prices move and as time passes, the advisability of hedging will change. As price opportunities present themselves, hedging will become more attractive.
Below is a one year chart of spot diesel futures prices as of October 11th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of October 11th.
Factors affecting the market on the period were:
During the week ended October 4th, total petroleum inventories increased by 3.82 million barrels vs. a five year average decrease of 0.27 million barrels and vs. an expected increase of 1.60 million barrels. Inventories increased by 4.09 million barrels vs. the five year average. Total inventories stand at 716.5 million barrels, up from 712.6 million barrels at the end of the previous week. The five year average inventory is 692.9 million barrels, down from 693.2 million barrels at the end of the previous week.
Current inventories are 3.40% larger than the five year average up from +2.81% at the end of the previous week. Inventories versus the five year average on a percentage basis remain positive. This helps to mitigate the effects of supply disruption and decreases price volatility.
As of October 8th, the net speculative long position in petroleum futures was 305,606,000 barrels up 597,000 barrels (+.20%) from the previous week. The level of speculation increased for the first time in six weeks. This level of speculation represents 42.66% of domestic inventories. Speculation is 5.94% above its one year moving average and is 28.75% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on October 8th was 305.25 cents per gallon, up 9.72 cents from 295.53 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 55.02% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 30.27% of the price movement of diesel fuel is explained by changes in levels of speculation. This statistical relationship has stabilized and has increased in recent weeks in an environment of high speculation which tends to increase correlation. Other fundamental factors such as higher domestic production remain as important price drivers in the current environment. 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 277.16 cents per gallon (a decrease on the week) or 26.09 cents per gallon less than current prices. The analysis would indicate that about 8.60% of current price is attributable to speculation and its underlying market rationale. The "would be" price was down about 1 cent on the week.
The net speculative long position has been variable over the past year ranging between 181 million and 429 million barrels with an average of about 288 million barrels, which was a decrease of about 1 million barrels on the week.
The graph below is three year history of speculative position levels.
Linwood Capital, LLC is an institutional fuel hedging management and consulting firm. Linwood creates and manages customized fuel hedging programs primarily for public clients on a nationwide basis.