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OPEC Failing - Prices Lower - Speculation Lower - Inventories Spike
During the week ending November 4th, the spot month diesel futures price decreased by 12.73 cents per gallon (-8.17%) while the deferred months decreased by 7 to 12 cent per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 13.34 cent premium to the spot price, from a premium of 11.83 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and higher inventories with respect to demand. Demand includes speculative demand which decreased 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 November 4th, the spot month gasoline futures price decreased by 7.63 cents per gallon (-5.24%) while the deferred months decreased by 8 to 10 cents per gallon making the forward pricing curve lower and relatively unchanged in slope. The one year forward price ended the week at a 1.56 cent premium to the spot price, from a premium of 2.45 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and steady inventory levels with respect to supply and demand. Demand includes speculative demand which was lower on the week.
The US dollar was lower on the week which is positive for price. Inventories on the week were sharply higher which is negative for price. The stock market, as a proxy for demand expectations, was lower which is negative for price. Speculation was lower on the week which is negative for price. US domestic crude production was higher which is negative for price. Domestic production is down 6.97% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was higher on the week which is negative for price.
Weekly US petroleum demand decreased by 2.84% during the week ending October 28th. Domestic demand is up 2.63% vs. one-year ago and demand is currently 5.01% above the five year average.
Domestic production increased for the third week after reaching a nine week low. Current production is 6.96% below year ago levels. The number of operating oil drilling rigs in the US resumed its increase and stands at 450 which is 9 more than the previous week, 134 more than the recent low of 316 and 72.03% lower than the peak of 1609 in October 2014. This is a nine-month high rig count. A higher rig count is negative for price. The increasing rig count is causing US production to stabilize as the global rebalancing of supply and demand continues. US domestic production has decreased by 967,000 barrels per day since the beginning of the year and 1,088,000 barrels per day since the peak of 9.61 million barrels per day in June 2015.
Below is the one-year chart of spot diesel futures prices as of November 4th.
Below is the one-year chart of spot gasoline futures prices as of November 4th.
MARKET FACTORS & COMMENTARY:
: : Inventories increased by 10.39 million barrels while inventories were expected to decrease by 1.18 million barrels on the week. The five-year average inventory decreased by 3.20 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : On 10/31, there was an explosion on the colonial pipeline which is the main artery for diesel and gasoline from the Texas Gulf Coast to the northeast and supplies a significant portion of the refined product. With this, gasoline and diesel futures prices spiked. As the damaged pipeline was repaired, prices resumed to normal levels.
: : A record build in domestic crude oil inventories sent prices lower and will keep downward pressure on prices.
: : Hopes have faded that OPEC will be able to implement the promised production cut which is negative for price. In October, OPEC produced another record high volume of oil at the rate of 34.02 million barrels per day up from 33.85 million barrels per day in September.
: : The Stock market decreased by -1.94% which is negative for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -1.30% on the week 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 for this purpose and prices decrease accordingly. Conversely, a weaker dollar increases relative demand for commodities and prices increase.
The charts below show supply and demand history and expectations for October and November. Supply and demand are in the process of re-balancing which is the main cause of steady to higher price levels over the past 6 months. The November forecast indicates that the rebalancing of supply and demand globally will be occurring slower than expected in October which is negative for price. When the two forecasts are compared, the November forecast shows an expectation of a slightly higher surplus through 2017 which is negative for price.
Below is the one-year chart US stock market prices as of November 4th.
Below is the one-year chart for the US dollar index as of November 4th.
During the week ended October 28th, total petroleum inventories increased by 10.39 million barrels vs. a five year average decrease of 3.20 million barrels and vs. an expected decrease of 1.18 million barrels. Inventories increased by 13.59 million barrels vs. the five year average and increased by 11.56 million barrels vs. expectations. Total inventories stand at 856.9 million barrels, up from 846.5 million barrels at the end of the previous week. The five year average inventory is 697.1 million barrels, down from 700.3 million barrels at the end of the previous week.
Current inventories are 22.94% higher than the five year average, up from +20.89% at the end of the previous week.
As of November 1st, the net speculative long position in petroleum futures was 293,287,000 barrels, down 27,988,000 barrels (-8.71%) from the previous week. Speculation decreased for the second week and represents 34.23% of domestic inventories. Speculation is 59.39% above its one year moving average. The corresponding spot month diesel futures price on November 1st was 151.69 cents per gallon, down 4.62 cents from 156.31 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 66.90% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 44.76% of diesel fuel price movements are explained by changes in level of speculation.
The net speculative long position has been variable over the past year ranging between 57 million and 340 million barrels with an average of about 184 million barrels, which is up about 3 million barrels on the week.
Based on a multiple regression analysis considering the level of the dollar, speculation, and inventory over the past five years as of November 1st, the market price for spot month diesel futures is estimated to be 148.48 versus the actual price of 151.69. This indicates that the market is currently overvalued by 3.21 cents per gallon given the assumptions of the pricing model.
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.