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Fiscal Cliff - Lower Prices - Larger Inventories - Speculation Up Slightly
During the week ending November 30th, the spot month heating oil futures price decreased by 3.58 cents per gallon (-1.16%) while the deferred months decreased by 0 to 2 cents per gallon making the forward pricing curve slightly lower and less negatively sloped. The one year forward price ended the week at a 2.42 cent (0.80%) discount to the spot price, from a discount of 4.53 cents (1.47%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates relatively unchanged demand expectations and higher inventory levels with respect to supply and demand. Demand includes speculative demand which decreased on the week and can be volatile. When the forward pricing curve increases in slope (less negative or more positive), this indicates larger inventories and is generally negative for price.
During the week ending November 30th, the spot month gasoline futures price increased by 1.75 cents per gallon (+0.64%) while the deferred months increased by 0 to 1 cents per gallon making the forward pricing curve slightly higher and more negatively sloped. The one year forward price ended the week at a 20.08 cent (7.84%) discount to the spot price, from a discount of 18.32 cents (7.15%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates slightly higher demand expectations and lower 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. Fear of falling off of the "Fiscal Cliff" continues to ebb and flow. If the "fiscal cliff" risk starts to negatively affect the economy, demand expectations and price will fall. Larger than expected inventories on the week were negative for price. The US Dollar was slightly lower and the stock market was slightly higher both of which were positive for petroleum prices. Speculation was up on the week also supporting price.
Weekly US petroleum demand decreased by 2.41% during the week ending November 23rd. Demand is up 0.32% vs. one year ago and remains below the five year average.
The attractiveness of making new hedges was relatively unchanged on the week. The negatively sloped forward pricing curve allows hedging further into the future at lower prices but also generally indicates lower inventories/high speculation that is supportive of price. 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 30th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of November 30th.
Factors affecting the market on the period were:
During the week ended November 23rd, total petroleum inventories increased by 2.72 million barrels vs. a five year average increase of 5.17 million barrels and vs. an expected increase of 1.75 million barrels. Inventories decreased by 2.45 million barrels vs. the five year average. Total inventories stand at 690.4 million barrels, up from 687.7 million barrels at the end of the previous week. The five year average inventory is 683.9 million barrels, up from 678.7 at the end of the previous week. Current inventories are 0.96% larger than the five year average down from +1.33% at the end of the previous week. Versus the five year average, inventories remained positive for the sixth week.
As of November 27th, the net speculative long position in petroleum futures was 218,897,000 barrels up 11,767,000 barrels (+5.68%) from the previous week. The level of speculation increased on the week and represents 30.00% of domestic inventories. Speculation is 20.20% below its one year moving average and is 46.44% 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 27th was 300.94 cents per gallon, down 2.98 cents from 303.92 cents per gallon during the previous week.
Heating oil price and size of speculative net long position in petroleum are 83.32% correlated over the past 52 weeks ( lower on the week) indicating that, on a statistical basis over the past year 69.44% 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 240.07 cents per gallon or 60.87 cents per gallon less than current prices. The analysis would indicate that about 20.23% 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 one cent 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 274 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.