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Fiscal Cliff - Steady Prices and Speculation - Larger Inventories
During the week ending November 23rd, the spot month heating oil futures price increased by 9.03 cents per gallon (+3.02%) while the deferred months increased by 4 to 9 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 4.53 cent (1.47%) discount to the spot price, from a discount of 2.07 cents (0.90%) 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 decreased on the week and can be volatile.
During the week ending November 23rd, the spot month gasoline futures price increased by 3.38 cents per gallon (+1.25%) while the deferred months increased by 4 to 7 cents per gallon making the forward pricing curve higher and less negatively sloped. The one year forward price ended the week at an 18.32 cent (7.15%) discount to the spot price, from a discount of 21.05 cents (8.42%) 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.
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. Less fear of falling off of the "Fiscal Cliff" has generally supported "risk" assets including petroleum. Smaller than expected inventories on the week were positive for price. The US Dollar was lower and the stock market was higher both of which were positive for petroleum prices. Speculation was up on the week also supporting price.
Weekly US petroleum demand increased by 0.47% during the week ending November 16th. Demand is down 1.42% 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 23rd.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of November 23rd.
Factors affecting the market on the period were:
During the week ended November 16th, total petroleum inventories decreased by 5.69 million barrels vs. a five year average decrease of 0.25 million barrels and vs. an expected increase of 1.00 million barrels. Inventories increased by 5.43 million barrels vs. the five year average. Total inventories stand at 687.7 million barrels, down from 693.4 million barrels at the end of the previous week. The five year average inventory is 678.7 million barrels, down from 679.0 at the end of the previous week. Current inventories are 1.33% larger than the five year average up down +2.13% at the end of the previous week. Versus the five year average, inventories remained positive for the fifth week.
As of November 20th, the net speculative long position in petroleum futures was 207,130,000 barrels up 15,372,000 barrels (+8.02%) from the previous week. The level of speculation increased on the week and represents 30.12% of domestic inventories. Speculation is 24.83% below its one year moving average and is 49.32% below the 52 week high level. Levels remain 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 20th was 303.92 cents per gallon, up 7.84 cents from 296.08 cents per gallon during the previous week.
Heating oil price and size of speculative net long position in petroleum are 83.81% correlated over the past 52 weeks ( lower on the week) indicating that, on a statistical basis over the past year 70.24% 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 239.02 cents per gallon or 64.90 cents per gallon less than current prices. The analysis would indicate that about 21.35% 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 276 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.