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Dollar Spikes - Prices Lower - Speculation Plummets - Inventories Lower
During the week ending November 11th, the spot month diesel futures price decreased by 2.91 cents per gallon (-2.03%) while the deferred months decreased by 1 to 3 cent per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 14.36 cent premium to the spot price, from a premium of 13.34 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 11th, the spot month gasoline futures price decreased by 7.33 cents per gallon (-5.32%) while the deferred months decreased by 2 to 6 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 4.90 cent premium to the spot price, from a premium of 1.56 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Demand includes speculative demand which was lower on the week.
The US dollar was sharply higher on the week which is negative for price. Inventories on the week were lower higher 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 which is negative for price. Domestic production is down 5.37% 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 increased by 1.54% during the week ending November 4th. Domestic demand is up 1.51% vs. one-year ago and demand is currently 2.07% above the five year average.
Domestic production increased for the fourth week after reaching a nine week low and is at the highest level since June 16th. Current production is 5.37% below year ago levels. The number of operating oil drilling rigs in the US resumed its increase and stands at 452 which is 2 more than the previous week, 136 more than the recent low of 316 and 71.91% lower than the peak of 1609 in October 2014. This is a new 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 527,000 barrels per day since the beginning of the year and 918,000 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 11th.
Below is the one-year chart of spot gasoline futures prices as of November 11th.
MARKET FACTORS & COMMENTARY:
: : Inventories decreased by 2.36 million barrels while inventories were expected to decrease by 1.43 million barrels on the week. The five-year average inventory decreased by 0.86 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : OPEC's global demand forecast for 2017 increased by 300,000 barrels per day from 93 million bpd to 93.3 million bpd. This forecast is positive for price yet may be due to lower prices which will stimulate demand in 2017.
: : The unexpected results of the US election caused market volatility especially with the US Dollar which drives prices of petroleum. The volatility and uncertainty due to the election seems to have abated.
: : There continues to be uncertainty regarding OPEC's ability to curtail supply from its members in an attempt to support prices. Lower market prices indicate that the probability of success of a meaningful and sustained cut in OPEC production is low.
: : The International Energy Agency raised its global production forecast for 2017 by 500,000 barrels per day from an earlier forecast of +100,000 barrels per day. This forecast is negative for price and signals the protraction of the imbalance of supply and demand in the global petroleum market.
: : Iran boosted its production by the most since the sanctions ended earlier this year. Their October production increased by 210,000 barrels per day versus September where a decrease of 20,000 barrels per day was expected. This is positive for supply and negative for price and makes any agreement among OPEC nations less consequential.
: : The Stock market increased by +3.08% which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +2.06% on the week 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.
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 11th.
Below is the one-year chart for the US dollar index as of November 11th.
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 decreased by 1.49 million barrels vs. the five year average and decreased by 0.93 million barrels vs. expectations. Total inventories stand at 854.6 million barrels, down from 856.9 million barrels at the end of the previous week. The five year average inventory is 696.2 million barrels, down from 697.1 million barrels at the end of the previous week.
Current inventories are 22.75% higher than the five year average, down from +22.94% at the end of the previous week.
As of November 8th, the net speculative long position in petroleum futures was 207,052,000 barrels, down 86,235,000 barrels (-29.40%) from the previous week. Speculation decreased for the third week and represents 24.23% of domestic inventories. Speculation is 11.62% above its one year moving average. The corresponding spot month diesel futures price on November 8th was 144.11 cents per gallon, down 7.58 cents from 151.69 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 68.94% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 47.52% 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 185 million barrels, which is up about 1 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 8th, the market price for spot month diesel futures is estimated to be 139.81 versus the actual price of 144.11. This indicates that the market is currently overvalued by 4.30 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.