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Dollar Higher - Speculation Plummets - Production Higher - Stock Market Lower - Inventory Higher
During the week ending November 23rd, the spot month diesel futures price decreased by 19.75 cents per gallon (-9.52%) while the deferred months decreased by 12 to 20 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 2.59 cent premium to the spot price, from a discount of 0.03 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and increasing inventories with respect to demand. Demand also includes speculation 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 23rd, the spot month gasoline futures price decreased by 18.57 cents per gallon (-11.78%) while the deferred months decreased by 13 to 20 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 4.48 cent premium to the spot price, from a premium of 1.68 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower current demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was lower on the week.
Weekly US petroleum demand decreased by 5.02% during the week ending November 16th. Domestic demand is up by 6.92% vs. one-year ago and demand is currently 7.44% above the five year average.
Domestic production made a new all-time high level on the week and is 21.14% above year ago levels. The number of operating oil drilling rigs in the US decreased from 888 to 885 on the week. Currently, this is 569 more than the low of 316 rigs in 2016 and 45.00% lower than the peak of 1609 in October 2014. This high and increasing rig count is causing US production to generally grow and is a factor in buffering supply disruptions in other parts of the world. US domestic production has increased by 3,272,000 barrels per day (+38.82%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of November 23rd.
Below is the one-year chart of spot gasoline futures prices as of November 23rd.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 3.48 million barrels while inventories were expected to decrease by 0.25 million barrels on the week. The five-year average inventory increased by 1.90 million barrels. Inventories increased vs. the five year average and vs. expectations.
: : Fear of too much supply drove prices lower on the week. Many countries have received waivers from the US and will be permitted to purchase from Iran at least for the immediate future. This means that the supply crunch that was expected will not happen.
: : In anticipation of a supply crunch, many buyers of Saudi oil were buying more to safeguard against any shortage. This prompted Saudi Arabia to produce more in November. Saudi production rose to 11.2 million barrels per day which is 500,000 barrels per day above October levels. More supply without the real bite of Iranian sanctions means rising inventories and lower prices – for now.
: : US and Russian production remains at all-time highs. Higher prices have increased production and inventories are growing. This is, of course, negative for price.
: : The questions that the market needs the answer to are: 1.) Will OPEC + Friends cut production to avoid creating a larger glut of inventory? 2.) Will US production continue to grow and will US crude exports grow? The market is currently expecting some sort of supply cut from OPEC but this cut may not solve the oversupply problem especially given the softer demand growth forecasts due to forecasts of slower global economic growth.
: : The Stock market decreased by -3.79% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.47% on the week which 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.
OPEC Production Five Year History - Up 1.53 million barrels per day from May to October.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of November 2018. According to the chart, global supply has been about 600,000 barrels per day less than consumption for the past year but roughly balanced for the fourth quarter of 2018 and then a surplus of 500,000 barrels per day is forecasted for 2019. In earlier forecasts, there was less of a surplus for the remainder of 2018 and 2019 meaning that this updated forecast is less supportive of price and may contribute to the next round of production cuts from OPEC + Friends.
Below is the one-year chart US stock market prices as of November 23rd.
Below is the one-year chart for the US dollar index as of November 23rd.
During the week ended November 16th, total petroleum inventories increased by 3.48 million barrels vs. a five year average increase of 1.90 million barrels and vs. an expected decrease of 0.25 million barrels. Inventories increased by 1.58 million barrels vs. the five year average and increased by 3.73 million barrels vs. expectations. Total inventories stand at 791.4 million barrels, up from 787.9 million barrels at the end of the previous week. The five year average inventory is 764.6 million barrels, up from 762.6 million barrels at the end of the previous week.
Current inventories are +3.51% versus the five year average, up from +3.31% at the end of the previous week. Inventory has been growing vs. the five year average since August and is the highest vs. FYA since January 12th.
16-month low speculation.
As of November 20th, the net speculative long position in petroleum futures was 222,601,000 barrels, down 12,860,000 barrels (-5.46%) from the previous week. Speculation decreased for the seventh week and represents 28.13% of domestic inventories. Speculation is 57.56% below its one year moving average. The corresponding spot month diesel futures price on November 20th was 199.02 cents per gallon, down 7.23 cents from 206.25 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are -31.77% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 10.10% of diesel fuel price movements are explained by changes in level of speculation. One-year correlation has increased in the past two weeks to less negative. This relationship remains very unusual.
The net speculative long position has been variable over the past year ranging between 222 million and 703 million barrels with an average of about 525 million barrels, which is down 6 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 20th, the market price for spot month diesel futures is estimated to be 165.13 versus the actual price of 199.02. This indicates that the market is currently overvalued by 33.89 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.