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OPEC Cuts Supply - Dollar Lower - Speculation Lower - Production Steady - Stock Market Lower - Inventory Lower
During the week ending December 7th, the spot month diesel futures price increased by 5.68 cents per gallon (+3.10%) while the deferred months increased by 3 to 6 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 3.89 cent premium to the spot price, from a premium of 4.34 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates higher 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 December 7th, the spot month gasoline futures price increased by 8.39 cents per gallon (+5.98%) while the deferred months increased by 6 to 8 cents per gallon making the forward pricing curve higher and less positively sloped. The one year forward price ended the week at a 4.18 cent premium to the spot price, from a premium of 4.71 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher current demand expectations and lower inventory levels with respect to supply and demand. Demand also includes speculation which was lower on the week.
Weekly US petroleum demand increased by 0.22% during the week ending November 30th. Domestic demand is up by 7.64% vs. one-year ago and demand is currently 7.20% above the five year average.
Domestic production remained at its all-time high level on the week and is 20.53% above year ago levels. The number of operating oil drilling rigs in the US decreased from 887 to 877 on the week. This is the sharpest one week drop since May 2016. Currently, this is 561 more than the low of 316 rigs in 2016 and 45.49% lower than the peak of 1609 in October 2014. This high 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 December 7th.
Below is the one-year chart of spot gasoline futures prices as of December 7th.
MARKET FACTORS & COMMENTARY:
: : Petroleum inventories decreased on the week by 1.82 million barrels while inventories were expected to increase by 0.64 million barrels on the week. The five-year average inventory increased by 4.77 million barrels. Inventories decreased vs. the five year average and vs. expectations.
: : OPEC and friends agree to cut production by 1.2 million barrels per day in order to avoid a supply glut and support price.
: : Libya’s largest oil field producing 315,000 barrels per day comes to a halt after an armed group forced a production halt. This will most likely be short-lived and the market is not interpreting this as a long-term situation.
: : The Stock market decreased by -4.60% which is negative for general economic activity and is negative for petroleum prices and petroleum demand expectations.
: : The US Dollar decreased by -0.78% on the week which is positive 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 1.33 million barrels per day from May to November – first decrease in six months – near two-year high levels.
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 December 7th.
Below is the one-year chart for the US dollar index as of December 7th.
During the week ended November 30th, total petroleum inventories decreased by 1.81 million barrels vs. a five year average increase of 4.77 million barrels and vs. an expected increase of 0.64 million barrels. Inventories decreased by 6.58 million barrels vs. the five year average and decreased by 2.45 million barrels vs. expectations. Total inventories stand at 795.0 million barrels, down from 796.8 million barrels at the end of the previous week. The five year average inventory is 772.1 million barrels, up from 767.3 million barrels at the end of the previous week.
Current inventories are +2.97% versus the five year average, down from +3.85% at the end of the previous week.
Speculation drops for the 9th week in a row to a 17-month low.
As of December 4th, the net speculative long position in petroleum futures was 180,104,000 barrels, down 36,687,000 barrels (-16.92%) from the previous week. Speculation decreased for the ninth week and represents 22.65% of domestic inventories. Speculation is 64.76% below its one year moving average. The corresponding spot month diesel futures price on December 4th was 190.09 cents per gallon, up 1.49 cents from 188.60 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are -9.85% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 0.97% of diesel fuel price movements are explained by changes in level of speculation. One-year correlation has increased in the past four weeks to less negative. This relationship remains very unusual.
The net speculative long position has been variable over the past year ranging between 180 million and 703 million barrels with an average of about 511 million barrels, which is down 7 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 December 4th, the market price for spot month diesel futures is estimated to be 162.25 versus the actual price of 190.09. This indicates that the market is currently overvalued by 27.84 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.