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Prices Steady - Inventory Lower - Speculation Lower
During the week ending October 18th, the spot month diesel futures price increased by 0.05 cents per gallon (+0.02%) while the deferred months were unchanged to down 3 cents per gallon making the forward pricing curve virtually unchanged in level and slope. The one year forward price ended the week at a 10.06 cent (3.31%) discount to the spot price, from a discount of 9.87 cents (3.25%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates steady demand expectations and steady 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 18th, the spot month gasoline futures price increased by 0.51 cents per gallon (+0.19%) while the deferred months changed from between up 1 cents to down 2 cents per gallon. This made the forward pricing curve virtually unchanged in level but more negatively sloped. The one year forward price ended the week at a 13.75 cent (5.42%) discount to the spot price, from a discount of 11.91 cents (4.67%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates steady demand expectations and slightly lower inventory levels with respect to supply and demand.
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 continues to be strong but decreased on the week which is positive for price.
Weekly US petroleum demand decreased by 0.28% during the week ending October 11th. Demand is up 0.93% vs. one year ago and demand is currently 1.05% above the five year average.
The attractiveness of making new hedges increased on the week with relatively steady prices and lower levels of speculation. Prices, however, continue to be average at best which does not represent relative opportunity. 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 18th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of October 18th.
Factors affecting the market on the period were:
During the week ended October 11th, total petroleum inventories decreased by 0.37 million barrels vs. a five year average increase of 0.31 million barrels and vs. an expected increase of 1.00 million barrels. Inventories decreased by 0.40 million barrels vs. the five year average. Total inventories stand at 716.1 million barrels, down from 716.5 million barrels at the end of the previous week. The five year average inventory is 692.9 million barrels, up from 692.9 million barrels at the end of the previous week.
Current inventories are 3.34% larger than the five year average down from +3.40% 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 15th, the net speculative long position in petroleum futures was 293,248,000 barrels down 12,358,000 barrels (-4.04%) from the previous week. The level of speculation decreased for the first time in two weeks and stands at its lowest level since July 2nd. This level of speculation represents 40.95% of domestic inventories. Speculation is 1.61% above its one year moving average and is 31.63% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on October 15th was 301.70 cents per gallon, down 1.55 cents from 303.25 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 57.27% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 32.79% 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 276.78 cents per gallon or 24.92 cents per gallon less than current prices. The analysis would indicate that about 8.26% of current price is attributable to speculation and its underlying market rationale. The "would be" price was down less than 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 289 million barrels, which was an increase 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.