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Petroleum Market Commentary - October 14, 2019

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

DIESEL:

During the week ending October 11th, the spot month diesel futures price increased by 6.31 cents per gallon (+3.33%) while the deferred months increased by 4 to 7 cents per gallon making the forward pricing curve higher and less negatively sloped. The one year forward price ended the week at a 9.88 cent discount to the spot price, from a discount of 10.46 cents at the end of the previous week.

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

GASOLINE:

During the week ending October 11th, the spot month gasoline futures price increased by 6.54 cents per gallon (+4.16%) while the deferred months increased by 4 to 7 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 14.54 cent discount to the spot price, from a discount of 13.64 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 lower on the week.

ANALYSIS:

DEMAND:

Weekly US petroleum demand increased by 3.16% during the week ending October 4th. Domestic demand is up by 3.04% vs. one-year ago and demand is currently 6.64% above the five year average.

PRODUCTION:

Domestic production increased to a new all-time high of 12.6 million barrels per day this past week which is a 200,000 barrel per day increase over the previous week. Domestic production is 12.50% above year ago levels. The number of operating oil drilling rigs in the US increased by 2 from 710 to 712 breaking 7 straight weeks of decreases. 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 11th.



Below is the one-year chart of spot gasoline futures prices as of October 11th.

MARKET FACTORS & COMMENTARY:

: :  Petroleum inventories decreased on the week by 2.23 million barrels while inventories were expected to decrease by 0.69 million barrels on the week. The five-year average inventory increased by 1.71 million barrels. Inventories decreased vs. expectations and vs. the five year average.

: :  Trade talk optimism boosted prices for the week with the announcement on Friday that phase one of the agreement between the US and China has been negotiated. This optimism boosted all risk assets and particularly petroleum as an improvement in the US/China trade dispute would mean higher global economic growth, higher petroleum demand, and higher petroleum prices.

: :  Turkish military action in Syria increases geopolitical risk and is supportive of price as there is an up-tick in the risk of supply disruption in the Middle-East.

: :  Turkish military action in Syria increases geopolitical risk and is supportive of price as there is an up-tick in the risk of supply disruption in the Middle-East.

: :  An Iranian tanker suffered a missile attack in the Red Sea again increasing the level of geopolitical risk in the Middle-East and causing an uptick in the risk of supply disruption.

: :  The Stock market increased by +0.63% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.

: :  The US Dollar decreased by -0.51% 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.

OCTOBER FORECAST



Below is the one-year chart of the US stock market as of October 11th



Below is the one-year chart of the US stock market as of October 11th



INVENTORIES:

During the week ended October 4th, total petroleum inventories decreased by 2.23 million barrels vs. a five year average increase of 1.71 million barrels and vs. an expected decrease of 0.69 million barrels. Inventories decreased by 3.94 million barrels vs. the five year average and decreased by 1.54 million barrels vs. expectations. Total inventories stand at 781.7 million barrels, down from 783.9 million barrels at the end of the previous week. The five year average inventory is 785.7 million barrels, up from 784.0 million barrels at the end of the previous week.

Current inventories are -0.52% versus the five year average, a decrease on the week from -0.02%.



SPECULATION:

As of October 8th, the net speculative long position in petroleum futures was 149,436,000 barrels, down 48,908,000 barrels (-24.66%) from the previous week. Speculation decreased for the third week and represents 19.12% of domestic inventories. Speculation is 42.20% below its one year moving average. The corresponding spot month diesel futures price on October 8th was 191.01 cents per gallon, up 1.16 cents per gallon from the prior week.

Diesel fuel price and size of speculative net long position in petroleum are 67.98% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 46.21% 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 431 million barrels with an average of about 259 million barrels, which is down 5 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.