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Prices Lower - Dollar Higher - Speculation Higher - Production Record
During the week ending November 14th, the spot month diesel futures price decreased by 8.34 cents per gallon (-3.34%) while the deferred months were lower by 7-11 cents per gallon making the forward pricing curve lower and generally more positively sloped. The one year forward price ended the week at a 0.33 cent discount to the spot price, from a premium of 0.64 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 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.
During the week ending November 14th, the spot month gasoline futures price decreased by 9.27 cents per gallon (-4.34%) while the deferred months decreased by 9 to 11 cents per gallon making the forward pricing curve lower and generally unchanged in slope. The one year forward price ended the week at a 1.03 cent premium to the spot price, from a premium of 0.06 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.
The US dollar was lower on the week which is positive for price. Inventories on the week were lower which is positive for price. The stock market, as a proxy for demand expectations, was higher which is positive for price. Speculation was higher on the week which is positive for price. US domestic crude production was higher on the week to another new all-time 40 year high which is negative for price. Domestic production is up 13.56% year over year.
Prices have decreased significantly in the past several months due to:
Mitigating factors to further downward price movements include:
The market is expecting some production cuts to come from the OPEC meeting in Vienna next Thursday. It is generally agreed that the market is near the bottom. Whether prices have further lower to go in this process remains to be seen.
Weekly US petroleum demand increased by 1.21% during the week ending November 7th. Domestic demand is down 0.97% vs. one-year ago and demand is currently 0.10% over the five year average.
The attractiveness of making new hedges was higher on the week as prices were lower even though speculation was higher. From a flat-price basis, prices remain very attractive. There also appears to be support in the market at current prices which mitigates the risk of significant opportunity cost in new hedging. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging may become more attractive.
Domestic production was higher on the week to yet another new 40 year high level. Domestic production has grown by 3 million barrels per day in the past three years. This represents more than 3% of global daily consumption and roughly 15% of domestic consumption. This growth is a major factor in the shift in price and fundamental market factors for global petroleum markets. It is affecting the global balance of political power as certain global powers rely more on oil revenues than others. Domestic production is relatively expensive however and further growth would be dampened by relatively low prices should lower prices persist. The number of drilling rigs employed in North Dakota drilling has decreased in recent weeks.
Below is the one-year chart of spot diesel futures prices as of November 14th.
Below is the one-year chart of spot gasoline futures prices as of November 14th.
: : Inventories decreasing by 2.73 million barrels while inventories were expected to decrease by 0.88 million barrels on the week. The five-year average inventory decreased by 3.36 million barrels. Inventories increased vs. the five year average and decreased vs. expectations.
: : OPEC seems to be in no hurry to cut production in order to support price. The market consensus is that there will be some production cut at next week's meeting in Vienna. If these cuts occur, price should be stabilized and move higher.
: : Larger-than-expected increase in US October retail sales and a larger than expected increase in US October consumer confidence. These factors are positive and supportive of stronger economic growth here in the US, which is positive for petroleum demand expectations and price.
: : Stronger-than-expected Eurozone third quarter GDP indicating that the sluggish Eurozone is less sluggish than thought. At the margin, this is positive for economic growth expectations, petroleum demand expectations and price.
: : Stock market increasing by 0.39% on the week which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by 0.13% which 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.
During the week ended November 7th, total petroleum inventories decreased by 2.73 million barrels vs. a five year average decrease of 3.36 million barrels and vs. an expected decrease of 0.88 million barrels. Inventories increased by 0.63 million barrels vs. the five year average. Total inventories stand at 698.9 million barrels, down from 701.6 million barrels at the end of the previous week. The five year average inventory is 704.3 million barrels, down from 707.6 million barrels at the end of the previous week.
Current inventories are 0.76% lower than the five year average, up from -0.85% at the end of the previous week. Inventory levels continue to remain close to the five year average.
As of November 11th, the net speculative long position in petroleum futures was 185,724,000 barrels up 17,968,000 barrels (+10.71%) from the previous week. Speculation increased for the first time in three weeks and represents 26.57% of domestic inventories. Speculation is 41.82% below its one year moving average. The corresponding spot month diesel futures price on November 11th was October 28th was 246.87 cents per gallon, up 2.60 cents from 244.27 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 72.38% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 52.39% of the price movement of diesel fuel is explained by changes in levels of speculation. 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 diesel futures price would be 247.30 cents per gallon or 0.43 cents per gallon more than current prices. The analysis would indicate that about -0.17% of current price is attributable to speculation and its underlying market rationale. This "would be" price was about 3 cents lower on the week.
The net speculative long position has been variable over the past year ranging between 166 million and 453 million barrels with an average of about 319 million barrels, which is down about 1 million barrels on the week.
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.