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Petroleum Market Commentary - November 11, 2019

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

DIESEL:

During the week ending November 8th, the spot month diesel futures price decreased by 1.50 cents per gallon (-0.78%) while the deferred months decreased by 0 to 1 cents per gallon making the forward pricing curve slightly lower and less negatively sloped. The one year forward price ended the week at a 6.13 cent discount to the spot price, from a discount of 7.41 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 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 November 8th, the spot month gasoline futures price decreased by 2.20 cents per gallon (-1.33%) while the deferred months decreased by 0 to 1 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 13.85 cent discount to the spot price, from a discount of 15.89 cents and the end of the previous week.

The change in level and shape of the forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.

ANALYSIS:

DEMAND:

Weekly US petroleum demand decreased by 2.14% during the week ending November 1st. Domestic demand is up by 2.37% vs. one-year ago and demand is currently 5.31% 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 8.62% above year ago levels. The number of operating oil drilling rigs in the US decreased by 7 from 691 to 684, decreasing for the third 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 November 8th.



Below is the one-year chart of spot gasoline futures prices as of November 8th.

MARKET FACTORS & COMMENTARY:

: :  Petroleum inventories increased on the week by 4.48 million barrels while inventories were expected to decrease by 2.13 million barrels on the week. The five-year average inventory decreased by 0.83 million barrels. Inventories increased vs. expectations and vs. the five year average.

: :  Trade talk with China continues to drive market direction and sentiment. On reports that progress is being made, prices rise and when comments are made that indicate things are not going as well as thought, prices retreat. As long as the trade dispute persists, it puts a damper on global economic growth which is negative for petroleum demand expectations and price.

: :  OPEC sees its share of the global crude market decreasing over time as US shale production increases. This means that OPEC will need to perhaps decrease or at least increase its production at a lower rate as global demand increases.

: :  OPEC has indicated that it is not inclined to further cut production at its upcoming meeting in December. This increases supply expectations. OPEC already produces less than the quotas that are currently in place so changing the target figures most likely would not affect production.

: :  The Stock market increased by +0.85% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.

: :  The US Dollar increased by +1.15% 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 and prices decrease accordingly. Conversely, a weaker dollar increases relative demand for commodities and prices increase.

OPEC Production Five Year History – up 1,110,000 barrels per day in October as Saudi Arabian production was restored after the attack. This low level of OPEC production continues to be supportive of price.



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 November 8th



Below is the one-year chart of the US stock market as of November 8th



INVENTORIES:

During the week ended November 1st, total petroleum inventories increased by 4.48 million barrels vs. a five year average decrease of 0.83 million barrels and vs. an expected decrease of 2.13 million barrels. Inventories increased by 5.31 million barrels vs. the five year average and increased by 6.61 million barrels vs. expectations. Total inventories stand at 783.1 million barrels, up from 778.7 million barrels at the end of the previous week. The five year average inventory is 781.0 million barrels, down from 781.9 million barrels at the end of the previous week.

Current inventories are +0.27% versus the five year average, an increase on the week from -0.41%. This is the first week since August 23rd that inventories have been above the five year average. This is negative for price.



SPECULATION:

As of November 5th, the net speculative long position in petroleum futures was 225,899,000 barrels, up 7,578,000 barrels (+3.47%) from the previous week. Speculation increased for the fourth week and represents 28.85% of domestic inventories. Speculation is 9.29% below its one year moving average. The corresponding spot month diesel futures price on November 5th was 195.66 cents per gallon, down 0.03 cents per gallon from the prior week.

Diesel fuel price and size of speculative net long position in petroleum are 69.41% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 48.17% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation increased from the previous week and has been increasing over the past several weeks.

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 249 million barrels, which is down 1 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.