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11 Year Low Prices & Speculation - Rig Count Down - Inventories Record High
During the week ending December 11th,the spot month diesel futures price decreased by 19.68 cents per gallon (-14.66%) while the deferred months decreased by 5 to 15 cents per gallon making the forward pricing curve lower and more positively sloped. The one year forward price ended the week at a 29.67 cent premium to the spot price, from a premium of 22.68 cents at the end of the previous week.
The change in level and slope of the diesel forward pricing curve indicates lower demand expectations and higher supplies with respect to demand. Demand includes speculative demand 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 11th, the spot month gasoline futures price increased by 1.13 cents per gallon (+0.89%) while the deferred months changed by between down 6 cents to up one cent per gallon making the forward pricing curve mostly lower and less positively sloped. The one year forward price ended the week at a 1.40 cent premium to the spot price, from a premium of 6.36 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates steady to lower demand expectations and lower inventory levels with respect to supply and demand.
The US dollar decreased on the week which is positive for price. Inventories on the week were higher but lower than expected which is neutral for price. The stock market, as a proxy for demand expectations, was lower which is negative for price. Speculation was lower on the week which is negative for price. US domestic crude production was lower which is positive for price. Domestic production is up 0.50% year over year down from +1.31% year over year during the previous week.
Weekly US petroleum demand increased by 2.03% during the week ending December 4th. Domestic demand is down 0.55% vs. one-year ago and demand is currently 4.37% above the five year average.
Domestic production decreased on the week. The number of operating oil drilling rigs in the US decreased to its lowest level since April 2010. A lower rig count is positive for price.
OPEC production is up 5.80% year over year at near record levels. The imbalance in supply and demand is expected to last longer that was first thought and into 2016 and beyond. This will keep prices low for the short to medium-term. As global demand grows to meet supply and the market becomes balanced, prices will increase. If demand does not grow as quickly as expected, prices will fall to curtail supply.
Below is the one-year chart of spot diesel futures prices as of December 11th.
Below is the one-year chart of spot gasoline futures prices as of December 11th.
: : Inventories increased by 2.22 million barrels while inventories were expected to increase by 4.29 million barrels on the week. The five-year average inventory increased by 3.83 million barrels. Inventories decreased vs. the five year average and vs. expectations. The global market continues to be oversupplied by 1.5 to 2.0 million barrels per day which, along with large global inventories, will keep downward pressure on prices. This is expected to persist through 2016.
: : OPEC decided to leave production unchanged at their most recent meeting. This, combined with other producers increasing production to maximize revenue, is causing the market to be oversupplied and prices to remain down. This is causing inventories to balloon, rig counts to go down, investment to be curtailed, but until global production becomes balanced with demand, prices will remain weak. The market continues to seek the price level at which production with high marginal cost will be discontinued which will help stabilize price.
: : Stock market decreasing by 3.79% on the week is generally negative for economic and petroleum demand expectations and prices.
: : The US Dollar decreasing by -0.80% 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.
Below is the one-year chart US stock market prices as of December 11th.
Below is the one-year chart for the US dollar index as of December 11th.
During the week ended December 4th, total petroleum inventories increased by 2.22 million barrels vs. a five year average increase of 3.83 million barrels and vs. an expected increase of 4.29 million barrels. Inventories decreased by 1.61 million barrels vs. the five year average and decreased by 2.07 million barrels vs. expectations. Total inventories stand at 852.9 million barrels, up from 850.7 million barrels at the end of the previous week. The five year average inventory is 711.2 million barrels, up from 707.4 million barrels at the end of the previous week.
Current inventories are 19.92% higher than the five year average, down from +20.26 at the end of the previous week.
Speculation plummets to lowest since October 2008.
As of December 8th, the net speculative long position in petroleum futures was 57,225,000 barrels, down 17,011,000 barrels (-22.91%) from the previous week. Speculation decreased for the first time in two weeks and represents 6.71% of domestic inventories. Speculation is 68.19% below its one year moving average. The corresponding spot month diesel futures price on December 8th was 125.92 cents per gallon, down 10.98 cents from 136.90 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 85.43 correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 72.98% of diesel fuel price movements are explained by changes in level of speculation. With the current over supply situation and the expectation that this will persist, long-side speculation will remain relatively low.
The net speculative long position has been variable over the past year ranging between 57 million and 285 million barrels with an average of about 180 million barrels, which is down 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, the market price for spot month diesel futures is estimated to be 137.83 versus the actual price of 114.56. This indicates that the market is currently undervalued by 23.27 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.