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Prices Higher - Dollar Up - Speculation Lower - Production Record
During the week ending October 31st, the spot month diesel futures price increased by 3.26 cents per gallon (+1.31%) while the deferred months were higher by 0-4 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 2.30 cent premium to the spot price, from a premium of 3.21 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates higher demand expectations and lower supplies with respect to demand. Demand includes speculative demand 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 31st, the spot month gasoline futures price decreased by 1.22 cents per gallon (-0.56%) while the deferred months increased by 0 to 2 cents per gallon making the forward pricing curve slightly higher and more positively sloped. The one year forward price ended the week at a 0.98 cent premium to the spot price, from a discount of 1.09 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and lower 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 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 was higher on the week to a new all-time 40 year high which is negative for price. Domestic production is up 14.22% year over year.
Prices have decreased significantly in the past several weeks due to:
Mitigating factors to further downward price movements include:
The big question is what will happen at the regularly scheduled OPEC meeting on November 27th. Will OPEC and Saudi Arabia in particular curtail production in order to support price or will they leave production unchanged thus enforcing a new lower price range, protecting their market share, and discouraging the pace of oil supply growth. During the past week it appears that Saudi Arabia will continue to lower prices to retain market share. The question is how much of this is already baked into the price and is the market price already down to its natural cushion price where demand will be stimulated and supply curtailed.
Weekly US petroleum demand increased by 7.59% during the week ending October 24th. Domestic demand is up 1.15% vs. one-year ago and demand is currently 1.37% over the five year average.
The attractiveness of making new hedges was mixed as prices were higher but speculation was lower. From a flat-price basis, prices are very attractive. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging may become more attractive.
Domestic production was higher on the week to a new 40 year high level. Domestic production has grown by 3 million barrels per day in the past three years. This represents more than 3% of global daily consumption and roughly 15% of domestic consumption. This growth is a major factor in the shift in price and fundamental market factors for global petroleum markets. It is beginning to affect the global balance of political power. This production is expensive however and further growth would be dampened by relatively low prices should lower prices persist.
Below is the one-year chart of spot diesel futures prices as of October 31st.
Below is the one-year chart of spot gasoline futures prices as of October 31st.
: : Inventories decreasing by 4.47 million barrels while inventories were expected to increase by 1.70 million barrels on the week. The five-year-average inventory decreased by 2.24 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : OPEC is not expected to take any action to curtail supply until their meeting on November 27th. Then there is speculation that Saudi Arabia may not cut its output but rather push prices down to maintain its market share.
: : China showing signs of economic strength with their third quarter GDP being stronger than expected and Chinese crude oil processing up 9.1% year over year to the highest level in 15 months. The October Chinese HSBC manufacturing purchasing managers' index increased unexpectedly. While these things don't indicate a Chinese economy that is growing rapidly but does indicate that it is perhaps not as weak as first thought.
: : Stronger than expected US September existing home sales and stronger than expected domestic leading indicators indicate relative strength in the US economy. This is positive for economic growth prospects, petroleum demand expectations, and price.
: : Eurozone October manufacturing activity ticked up unexpectedly showing some strength in the European economy which is a bright spot in a story that shows Europe in sluggish growth or a mild recession. The slow economy in Europe is negative for petroleum demand growth but good news is positive for demand growth and price at the margin.
: : Stock market increasing by 2.72% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by 1.38% to a four-year high on the week which is negative 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 for this purpose and prices decrease accordingly. Conversely, a weaker dollar increases relative demand for commodities and prices increase.
During the week ended October 24th, total petroleum inventories decreased by 4.47 million barrels vs. a five year average decrease of 2.24 million barrels and vs. an expected increase of 1.70 million barrels. Inventories decreased by 2.23 million barrels vs. the five year average. Total inventories stand at 703.3 million barrels, down from 707.7 million barrels at the end of the previous week. The five year average inventory is 711.1 million barrels, down from 713.3 million barrels at the end of the previous week.
Current inventories are 1.10% lower than the five year average, down from -0.78% at the end of the previous week. Inventory levels continue to remain close to the five year average.
As of October 28th, the net speculative long position in petroleum futures was 182,486,000 barrels down 8,214,000 barrels (-4.41%) from the previous week. Speculation decreased for the first time in two weeks and represents 25.29% of domestic inventories. Speculation is 44.79% below its one year moving average. The corresponding spot month diesel futures price on October 28th was 249.31 cents per gallon, down 2.01 cents from 251.32 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 69.58% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 48.41% of the price movement of diesel fuel is explained by changes in levels of speculation. 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 254.11 cents per gallon or 4.80 cents per gallon more than current prices. The analysis would indicate that about -1.93% of current price is attributable to speculation and its underlying market rationale. This "would be" price was about 4 cents lower on the week.
The net speculative long position has been variable over the past year ranging between 166 million and 453 million barrels with an average of about 322 million barrels, which is down about 2 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.