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Dollar Spikes Again - Prices Higher - Speculation Down - Rig Count Up
During the week ending November 18th, the spot month diesel futures price increased by 5.65 cents per gallon (+4.03%) while the deferred months increased by 2 to 5 cent per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 12.30 cent premium to the spot price, from a premium of 14.36 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher demand expectations and lower 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 18th, the spot month gasoline futures price increased by 3.38 cents per gallon (+2.59%) while the deferred months increased by 2 to 4 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 4.43 cent premium to the spot price, from a premium of 4.90 cents 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. Demand includes speculative demand which was lower on the week.
The US dollar was sharply higher again on the week which is negative for price. Inventories on the week were higher which is negative 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 lower which is negative for price. Domestic production is down 5.46% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was sharply higher on the week which is negative for price.
Weekly US petroleum demand decreased by 4.17% during the week ending November 11th. Domestic demand is up 1.06% vs. one-year ago and demand is currently 1.77% above the five year average.
Domestic production decreased for the first time in five weeks after reaching a five-month high. Current production is 5.46% below year ago levels. The number of operating oil drilling rigs in the US resumed its increase and stands at 471 which is 19 more than the previous week, 155 more than the recent low of 316 and 70.73% lower than the peak of 1609 in October 2014. This is a new ten-month high rig count. A higher rig count is negative for price. The increasing rig count is causing US production to stabilize and grow as the global rebalancing of supply and demand continues. US domestic production has decreased by 538,000 barrels per day since the beginning of the year and 929,000 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 18th.
Below is the one-year chart of spot gasoline futures prices as of November 18th.
MARKET FACTORS & COMMENTARY:
: : Inventories increased by 6.33 million barrels while inventories were expected to decrease by 1.14 million barrels on the week. The five-year average inventory decreased by 2.18 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : Optimism grew that OPEC will be able to formulate a supply cut at its upcoming meeting in Vienna. Russia is also indicating that it would be willing to support the limiting of production further firming prices. Of course, whether there is actual agreement and actual production cuts remains to be seen.
: : A new crude oil deposit was found in the Permian Basin in West Texas which is three times the size of the Bakken Shale in North Dakota. This is obviously positive for US production in the long-term and negative for price. The deposit is estimated at 20 billion barrels which is equivalent to 215 days of current global demand.
: : The International Energy Agency (IEA) forecasts that US domestic production will increase from 8.5 million barrels per day currently to 14.1 million barrels per day by 2020. This will account for a large portion of expected global demand growth and should mitigate upward price risk.
: : The Stock market increased by +0.81% which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +2.17% 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 18th.
Below is the one-year chart for the US dollar index as of November 18th.
During the week ended November 11th, total petroleum inventories increased by 6.33 million barrels vs. a five year average decrease of 2.18 million barrels and vs. an expected decrease of 1.14 million barrels. Inventories increased by 8.51 million barrels vs. the five year average and increased by 7.47 million barrels vs. expectations. Total inventories stand at 860.9 million barrels, up from 854.6 million barrels at the end of the previous week. The five year average inventory is 694.0 million barrels, down from 696.2 million barrels at the end of the previous week.
Current inventories are 24.05% higher than the five year average, up from +22.75% at the end of the previous week.
As of November 15th, the net speculative long position in petroleum futures was 188,724,000 barrels, down 18,328,000 barrels (-8.85%) from the previous week. Speculation decreased for the fourth week and represents 21.92% of domestic inventories. Speculation is 0.61% above its one year moving average. The corresponding spot month diesel futures price on November 15th was 145.77 cents per gallon, up 1.66 cents from 144.11 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 70.49% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 49.68% 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 188 million barrels, which is up about 3 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 15th, the market price for spot month diesel futures is estimated to be 124.37 versus the actual price of 145.77. This indicates that the market is currently overvalued by 21.40 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.