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Petroleum Market Commentary - October 21, 2019

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

DIESEL:

During the week ending October 18th, the spot month diesel futures price decreased by 1.05 cents per gallon (-0.54%) while the deferred months decreased by 1 to 3 cents per gallon making the forward pricing curve lower and more negatively sloped. The one year forward price ended the week at an 11.58 cent discount to the spot price, from a discount of 9.88 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 higher 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 18th, the spot month gasoline futures price decreased by 1.58 cents per gallon (-0.96%) while the deferred months decreased by 1 to 3 cents per gallon making the forward pricing curve lower and more negatively sloped. The one year forward price ended the week at a 15.76 cent discount to the spot price, from a discount of 14.54 cents and the end of the previous week.

The change in level and shape of the forward pricing curve indicates lower 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 decreased by 2.34% during the week ending October 11th. Domestic demand is up by 5.36% vs. one-year ago and demand is currently 6.47% above the five year average.

PRODUCTION:

Domestic production remained at the new all-time high of 12.6 million barrels per day this past week. Domestic production is 15.60% above year ago levels. The number of operating oil drilling rigs in the US increased by 1 from 712 to 713, increasing for the second week. The recent decline in US rig count is due to a pause in further investment in exploration and production. US domestic production has increased by 4,172,000 barrels per day (+49.50%) since the low on July 1, 2016.









Below is the one-year chart of spot diesel futures prices as of October 18th.



Below is the one-year chart of spot gasoline futures prices as of October 18th.

MARKET FACTORS & COMMENTARY:

: :  Petroleum inventories increased on the week by 2.90 million barrels while inventories were expected to decrease by 1.40 million barrels on the week. The five-year average inventory increased by 1.22 million barrels. Inventories increased vs. expectations and vs. the five year average.

: :  Trade talk optimism evaporated during the week as the market realized that the process will be longer and less certain than first thought. As long as the trade dispute persists, it puts a damper on global economic growth which is negative for petroleum demand expectations and price.

: :  As evidence of the softening of the global economy, Germany is nearing recession. This decreases petroleum demand expectation for Germany and also is a harbinger of what may happen to other developed economies.

: :  The International Energy Agency (IEA) said that OPEC faces a serious challenge as they will need to cut supplies further than their current levels amid a global market of lower demand and higher supply. If they do not cut and produce less, the market will become oversupplied and prices will decrease.

: :  The Stock market increased by +0.54% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.

: :  The US Dollar decreased by -1.04% 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 18th



Below is the one-year chart of the US stock market as of October 18th



INVENTORIES:

During the week ended October 11th, total petroleum inventories increased by 2.90 million barrels vs. a five year average increase of 1.22 million barrels and vs. an expected decrease of 1.40 million barrels. Inventories increased by 1.68 million barrels vs. the five year average and increased by 4.30 million barrels vs. expectations. Total inventories stand at 784.6 million barrels, up from 781.7 million barrels at the end of the previous week. The five year average inventory is 787.0 million barrels, up from 785.7 million barrels at the end of the previous week.

Current inventories are -0.31% versus the five year average, an increase on the week from -0.52%.



SPECULATION:

As of October 15th, the net speculative long position in petroleum futures was 157,006,000 barrels, up 7,570,000 barrels (+5.07%) from the previous week. Speculation increased for the first time in four weeks and represents 20.01% of domestic inventories. Speculation is 38.23% below its one year moving average. The corresponding spot month diesel futures price on October 15th was 191.00 cents per gallon, down 0.01 cents per gallon from the prior week.

Diesel fuel price and size of speculative net long position in petroleum are 65.32% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 42.67% 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 254 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.