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Prices Lower - Rig Count Lower – Speculation Higher - Production Higher - Stock Market Higher - Inventory Higher – Dollar Higher
During the week ending November 29th, the spot month diesel futures price decreased by 5.05 cents per gallon (-2.62%) while the deferred months decreased by 4 to 5 cents per gallon making the forward pricing curve lower and slightly less negatively sloped. The one year forward price ended the week at a 5.02 cent discount to the spot price, from a discount of 5.19 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates lower demand expectations and higher inventories with respect to demand. Demand also includes speculation 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 29th, the spot month gasoline futures price decreased by 7.73 cents per gallon (-6.62%) while the deferred months decreased by 4 to 8 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at an 11.07 cent discount to the spot price, from a discount of 13.60 cents and the end of the previous week.
The change in level and shape of the forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.
Weekly US petroleum demand decreased by 0.59% during the week ending November 22nd. Domestic demand is up by 0.53% vs. one-year ago and demand is currently 6.12% above the five year average.
Domestic production remained at the new all-time high of 12.9 million barrels per day this past week. Domestic production is 10.26% above year ago levels. The number of operating oil drilling rigs in the US decreased by 3 from 671 to 668, decreasing for the sixth week. The recent decline in US rig count is due to a pause in further investment in exploration and production. US domestic production has increased by 4,472,000 barrels per day (+53.06%) since the low on July 1, 2016.
Below is the one-year chart of spot diesel futures prices as of November 29th.
Below is the one-year chart of spot gasoline futures prices as of November 29th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories increased on the week by 7.43 million barrels while inventories were expected to increase by 1.09 million barrels on the week. The five-year average inventory increased by 4.08 million barrels. Inventories increased vs. expectations and vs. the five year average.
: : Trade talk with China continues to drive market direction and sentiment. This past week, the president mentioned that phase one of the agreement is near completion and the market promptly hung its hat on that comment and drove prices higher on the highest speculation level since May. The trade negotiations continue to be a soap opera playing out in the stock market and petroleum markets as speculation pushes prices higher and lower. More tariffs are due on December 15th. As long as the trade dispute persists, it puts a damper on global economic growth which is negative for petroleum demand expectations and price.
: : The president’s support of the protestors in Hong Kong may dampen hopes of arriving at some sort of trade agreement with China.
: : OPEC’s meeting scheduled for this week in Vienna is expected to see no change in output targets although Iraq has been making some noise about further cuts of another 600,000 barrels per day. These further cuts are not the current expectation from the meeting. OPEC is expecting US shale production to begin to lose its shine which would allow OPEC to gain more market share and pricing power. We shall see. If they are wrong, prices may slide.
: : The Stock market increased by +0.99% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.
: : The US Dollar increased by +0.003% 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 and prices decrease accordingly. Conversely, a weaker dollar increases relative demand for commodities and prices increase.
OPEC Production Five Year History – down 110,000 barrels per day in November. This low level of OPEC production continues to be supportive of price.
SUPPLY & DEMAND:
The chart below shows supply and demand history and expectations as of November 2019. The chart shows the expectation of a slightly surplus market over the next four quarters. This forecast indicates slightly more supply than the October forecast over the next year. This is generally negative for price. If we see the projected 1 million barrel per day surplus in the second quarter of 2020, this will negatively affect price.
Below is the one-year chart of the US stock market as of November 29th
Below is the one-year chart of the US stock market as of November 29th
During the week ended November 22nd, total petroleum inventories increased by 7.43 million barrels vs. a five year average increase of 4.08 million barrels and vs. an expected increase of 1.09 million barrels. Inventories increased by 3.35 million barrels vs. the five year average and increased by 6.34 million barrels vs. expectations. Total inventories stand at 794.3 million barrels, up from 786.9 million barrels at the end of the previous week. The five year average inventory is 790.2 million barrels, up from 786.2 million barrels at the end of the previous week.
Current inventories are +0.52% versus the five year average, an increase on the week from +0.10%. This is the fourth week that inventories have been greater than the five year average. This is negative for price.
As of November 26th, the net speculative long position in petroleum futures was 316,690,000 barrels, up 85,625,000 barrels (+37.06%) from the previous week. Speculation increased for the first time in two weeks week and represents 39.87% of domestic inventories. Speculation is 25.98% above its one year moving average. The corresponding spot month diesel futures price on November 26th was 196.06 cents per gallon, up 10.32 cents per gallon from the prior week.
Diesel fuel price and size of speculative net long position in petroleum are 72.13% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 52.02% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation increased from the previous week and has been increasing over the past several weeks.
The net speculative long position has been variable over the past year ranging between 134 million and 431 million barrels with an average of about 251 million barrels, which is up 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.