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Speculation Up - Prices Up - Production Up - Rig Count Up - Inventory Up
During the week ending November 25th, the spot month diesel futures price increased by 1.23 cents per gallon (+0.84%) while the deferred months increased by 1 to 3 cent per gallon making the forward pricing curve higher and more positively sloped. The one year forward price ended the week at a 12.53 cent premium to the spot price, from a premium of 12.53 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher demand expectations and higher inventories with respect to demand. Demand includes speculative demand which increased 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 25th, the spot month gasoline futures price increased by 3.36 cents per gallon (+2.51%) while the deferred months increased by 3 to 4 cents per gallon making the forward pricing curve higher and more positively sloped. The one year forward price ended the week at a 4.94 cent premium to the spot price, from a premium of 4.43 cents 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. Demand includes speculative demand which was higher on the week.
The US dollar was 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 higher on the week which is positive for price. US domestic crude production was higher which is negative for price. Domestic production is down 5.18% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was higher on the week which is negative for price.
Weekly US petroleum demand increased by 3.54% during the week ending November 18th. Domestic demand is up 1.64% vs. one-year ago and demand is currently 0.97% above the five year average.
Domestic production increased for the second week and is 5.18% below year ago levels. The number of operating oil drilling rigs in the US increase by 3 and stands at 474. This is 158 more than the recent low of 316 and 70.54% 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 529,000 barrels per day since the beginning of the year and 920,000 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 25th.
Below is the one-year chart of spot gasoline futures prices as of November 25th.
MARKET FACTORS & COMMENTARY:
: : Inventories increased by 1.39 million barrels while inventories were expected to increase by 2.52 million barrels on the week. The five-year average inventory increased by 4.41 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : The market has been moving up and down in anticipation of OPEC's decision on whether to cut production as a group and if so, by how much. Prices have moved up and down on the bits and pieces of news are released. The movements have been a function of the probability and magnitude of a cut in OPEC production. It is not clear whether and to what extent OPEC will be able to agree to cut and then there is the enforcement piece. Optimism that they can make and keep and enforce a production cut agreement is low.
: : If OPEC supply were to be cut, it would be by perhaps 1.5 million barrels per day which is the amount by which OPEC production has grown over the past 6 months. Any cut in production would most likely result in higher prices where US shale producers would begin to produce more oil and ultimately driving prices lower again. Saudi Arabia has indicated that a cut may not be needed and that the current strategy will ultimately work in their favor.
: : The Stock market increased by +1.44% which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +0.28% 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 25th.
Below is the one-year chart for the US dollar index as of November 25th.
During the week ended November 18th, total petroleum inventories increased by 1.39 million barrels vs. a five year average increase of 4.41 million barrels and vs. an expected increase of 2.52 million barrels. Inventories decreased by 3.02 million barrels vs. the five year average and decreased by 1.13 million barrels vs. expectations. Total inventories stand at 862.3 million barrels, up from 860.9 million barrels at the end of the previous week. The five year average inventory is 698.4 million barrels, up from 694.0 million barrels at the end of the previous week.
Current inventories are 23.46% higher than the five year average, down from +24.05% at the end of the previous week.
As of November 22nd, the net speculative long position in petroleum futures was 208,696,000 barrels, up 19,972,000 barrels (+10.58%) from the previous week. Speculation increased for the first time in five weeks and represents 24.20% of domestic inventories. Speculation is 9.66% above its one year moving average. The corresponding spot month diesel futures price on November 22nd was 152.63 cents per gallon, up 8.24 cents from 144.39 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 73.23% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 53.63% 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 190 million barrels, which is up about 2 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 22nd, the market price for spot month diesel futures is estimated to be 114.75 versus the actual price of 152.63. This indicates that the market is currently overvalued by 37.88 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.