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Fiscal Cliff - Steady Prices and Speculation - Larger Inventories
During the week ending November 9th, the spot month heating oil futures price increased by 5.81 cents per gallon (+1.97%) while the deferred months increased by 6 to 7 cents per gallon making the forward pricing curve higher and less negatively sloped. The one year forward price ended the week at a 3.20 cent (1.06%) discount to the spot price, from a discount of 4.05 cents (1.37%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and higher inventory levels with respect to supply and demand. Demand includes speculative demand which decreased on the week and can be volatile.
During the week ending November 9th, the spot month gasoline futures price increased by 12.56 cents per gallon (+4.88%) while the deferred months increased by 7 to 10 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 20.63 cent (8.28%) discount to the spot price, from a discount of 15.28 cents (6.31%) 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.
Geopolitical risk continues to support price and the level of speculation while the Iranian/Syrian situations have not posed any additional threat to supply in the past weeks. Larger than expected inventories on the week were negative for price. The US Dollar was stronger and the stock market was weaker both of which were negative for petroleum prices. Speculation was down slightly on the week which is negative for price.
Weekly US petroleum demand increased by 0.25% during the week ending November 2nd. Demand is down 0.71% vs. one year ago and remains below the five year average.
Due to price action on the week, short-term hedging became slightly less attractive and longer term hedging became less attractive in light of the historical range of prices. The negatively sloped forward pricing curve allows hedging further into the future at lower prices. Spot diesel prices remain near the middle of the price range that we have seen over the past twelve months. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive. Entering new, longer-term hedges at these levels would involve less competition with speculators for long futures positions and at relatively attractive prices. Spot heating oil futures in the $2.80 - $2.90 level will trigger additional hedging.
Below is a one year chart of spot heating oil futures prices, the proxy hedging mechanism for diesel fuel, as of November 9th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of November 9th.
Factors affecting the market on the period were:
During the week ended November 2nd, total petroleum inventories increased by 4.77 million barrels vs. a five year average decrease of 2.83 million barrels and vs. an expected decrease of 1.25 million barrels. Inventories increased by 7.60 million barrels vs. the five year average. Total inventories stand at 695.3 million barrels, up from 690.5 million barrels at the end of the previous week. The five year average inventory is 681.4 million barrels, down from 684.2 at the end of the previous week. Current inventories are 2.04% larger than the five year average up from +0.92% at the end of the previous week. Versus the five year average, inventories remained positive for the third week and are at a 4 month high with respect to the five year average.
As of November 6th, the net speculative long position in petroleum futures was 221,831,000 barrels down 2,789,000 barrels (-1.24%) from the previous week. The level of speculation decreased on the week and represents 31.91% of domestic inventories. Speculation is 20.62% below its one year moving average and is 45.73% below the 52 week high level. Levels are now in the lower half of the range that we have seen over the past two years and lower than the one year average. The corresponding spot month heating oil futures price on November 6th was 305.29 cents per gallon, down 3.37 cents from 308.66 cents per gallon during the previous week.
Heating oil price and size of speculative net long position in petroleum are 85.77% correlated over the past 52 weeks ( lower on the week) indicating that, on a statistical basis over the past year 73.58% of the price movement of heating oil is explained by changes in levels of speculation. This statistical relationship continues to weaken yet remains high. 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 heating oil futures price would be 235.01 cents per gallon or 70.27 cents per gallon less than current prices. The analysis would indicate that about 23.02% of current price is attributable to speculation and its underlying market rationale. The "would be" price has bottomed, is slowly rising, and was up again by two cents on the week.
The net speculative long position has been variable over the past year ranging between 70 million and 410 million barrels with an average of about 279 million barrels, a decrease of roughly 2 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.