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Prices Down - Rig Count Up - Inventory Up - Speculation Down
During the week ending November 13th, the spot month diesel futures price decreased by 10.83 cents per gallon (-7.27%) while the deferred months decreased by 3 to 10 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 19.74 cent premium to the spot price, from a premium of 17.53 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates lower demand expectations and higher 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 November 13th, the spot month gasoline futures price decreased by 13.06 cents per gallon (-9.54%) while the deferred months decreased by 5 to 12 cents per gallon making the forward pricing lower and more positively sloped. The one year forward price ended the week at an 8.40 cent premium to the spot price, from a premium of 3.44 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.
The US dollar decreased slightly on the week which is positive for price. Inventories on the week were higher and higher than expected 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 up 1.34% year over year down from +2.10% year over year during the previous week.
Weekly US petroleum demand increased by 1.70% during the week ending November 6th. Domestic demand is up 1.16% vs. one-year ago and demand is currently 0.70% above the five year average.
Domestic production increased on the week and is at the highest level since August 28th. The number of operating oil drilling rigs in the US increased for the first time since August 28th. A low rig count is positive for the price of oil but the positive on the week is negative.
OPEC production is up 3.96% year over year at near record levels. The imbalance in supply and demand is expected to last longer that was first thought and into 2016 and beyond. This will keep prices low for the short to medium-term. As global demand grows to meet supply and the market becomes balanced, prices will increase. If demand does not grow as quickly as expected, prices will fall to curtail supply.
Below is the one-year chart of spot diesel futures prices as of November 13th.
Below is the one-year chart of spot gasoline futures prices as of November 13th.
: : Inventories increased by 2.47 million barrels while inventories were expected to decrease by 1.44 million barrels on the week. The five-year average inventory decreased by 3.31 million barrels. Inventories increased vs. the five year average and vs. expectations. The global market continues to be oversupplied by 1.5 to 2.0 million barrels per day which, along with large global inventories, will keep downward pressure on prices.
: : Russian production is up 1.3% year over year to a new record and OPEC is considering increasing its output target but this is simply to accommodate Indonesia which is joining OPEC and so doe3s not have much of an effect on the global market. This of course is indicating very large supply which contributes to the already existing glut of oil and is negative for price.
: : :: The Organization for economic cooperation and development decreased its estimates for global GDP in 2015 and 2016. This indicates a softer global economy than was expected which lowers petroleum demand expectations and is negative for price.
: : China's economy appears to be more sluggish than expected. The Chinese October Purchasing Managers' Index for Manufacturing was lower for the third straight month, the China trade report was weak, and the producer price index, a measure of inflationary pressures, was down the most in six years. This means lower petroleum demand expectations and price.
: : Stock market decreasing by -3.63% on the week is generally negative for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -0.17% 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.
Below is the one-year chart US stock market prices as of November 13th.
Below is the one-year chart for the US dollar index as of November 13th.
During the week ended November 6th, total petroleum inventories increased by 2.47 million barrels vs. a five year average decrease of 3.31 million barrels and vs. an expected decrease of 1.44 million barrels. Inventories increased by 5.79 million barrels vs. the five year average and increased by 3.91 million barrels vs. expectations. Total inventories stand at 841.4 million barrels, up from 838.9 million barrels at the end of the previous week. The five year average inventory is 701.4 million barrels, down from 704.7 million barrels at the end of the previous week.
Current inventories are 19.96% higher than the five year average, up from +19.05 at the end of the previous week.
As of November 10th, the net speculative long position in petroleum futures was 129,470,000 barrels, down 27,965,000 barrels (-17.76%) from the previous week. Speculation decreased for the first time in two weeks and represents 15.39% of domestic inventories. Speculation is 31.79% below its one year moving average. The corresponding spot month diesel futures price on November 10th was 148.65 cents per gallon, down 7.95 cents from 156.60 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 63.89 correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 40.82% of diesel fuel price movements are explained by changes in level of speculation. With the current over supply situation and the expectation that this will persist, long-side speculation will remain relatively low.
The net speculative long position has been variable over the past year ranging between 78 million and 285 million barrels with an average of about 190 million barrels, which is down 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, the market price is estimated to be 149.80 versus the actual price of 138.13. This indicates that the market is currently undervalued by 11.67 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.