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Prices Lower - Inventories Higher - Speculation Higher
During the week ending December 13th, the spot month diesel futures price decreased by 8.08 cents per gallon (-2.64%) while the deferred months were down by 3 to 8 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 4.97 cent (1.67%) discount to the spot price, from a discount of 7.22 cents (2.36%) and the end of the previous week.
The change in level and slope of this forward pricing curve indicates lower demand expectations and higher supplies with respect to demand. Demand includes speculative demand. 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 13th, the spot month gasoline futures price decreased by 9.67 cents per gallon (-3.58%) while the deferred months decreased by 6 to 10 cents per gallon making the forward pricing curve lower and less negatively sloped. The one year forward price ended the week at a 7.77 cent (3.05%) discount to the spot price, from a discount of 11.50 cents (4.40%) and the end of the previous week.
The change in level and shape of this forward pricing curve indicates lower demand expectations and higher inventory levels with respect to supply and demand.
The US dollar was lower on the week which is positive for price. Inventories on the week were higher which is negative for price. The stock market, as a proxy for demand expectations, was lower which is negative for price. Speculation was higher on the week which is positive for price. US domestic crude production continues to be strong and set a new high level since January 20, 1989. This remains negative for price.
Weekly US petroleum demand decreased by 7.10% during the week ending December 6th. Demand is up 4.01% vs. one year ago and demand is currently 3.72% above the five year average.
The attractiveness of making new hedges increased on the week as prices were lower. Speculation was higher on the week making new hedges involve completion with speculators for new long positions which is disadvantageous. As prices move and as time passes, the advisability of hedging will change. As further price opportunities present themselves, hedging will become more attractive.
Below is a one year chart of spot diesel futures prices as of December 13th.
Below is a one year chart of spot gasoline futures prices, the hedging mechanism for gasoline, as of December 13th.
Factors affecting the market on the period were:
During the week ended December 6th, total petroleum inventories increased by 0.67 million barrels vs. a five year average increase of 1.44 million barrels and vs. an expected decrease of 2.00 million barrels. Inventories decreased by 0.77 million barrels vs. the five year average. Total inventories stand at 712.5 million barrels, up from 711.8 million barrels at the end of the previous week. The five year average inventory is 698.5 million barrels, up from 697.0 million barrels at the end of the previous week.
Current inventories are 2.00% larger than the five year average down from +2.12% at the end of the previous week. Inventories versus the five year average on a percentage basis remain positive. This helps to mitigate the effects of supply disruption and decreases price volatility.
As of December 10th, the net speculative long position in petroleum futures was 323,495,000 barrels up 12,132,000 barrels (+3.90%) from the previous week. Speculation increased for the fourth week in a row and represents 45.41% of domestic inventories. Speculation is 8.18% above its one year moving average and is 24.58% below the 52-week high set on July 23rd. The corresponding spot month heating oil futures price on December 10th was 301.73 cents per gallon, down 4.78 cents from 306.51 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 68.66% correlated over the past 52 weeks (an increase on the week) indicating that, on a statistical basis over the past year 47.14% of the price movement of diesel fuel is explained by changes in levels of speculation. This statistical relationship has strengthened in recent weeks in an environment of relatively high speculation which tends to increase correlation. Other fundamental factors such as higher domestic production remain as important price drivers in the current environment. 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 diesel futures price would be 266.17 cents per gallon or 35.56 cents per gallon less than current prices. The analysis would indicate that about 11.78% of current price is attributable to speculation and its underlying market rationale. The "would be" price was down by about 1 cent on the week.
The net speculative long position has been variable over the past year ranging between 181 million and 429 million barrels with an average of about 299 million barrels, which was up about 3 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, advisory, and consulting firm. Linwood creates and manages customized fuel hedging programs for institutional consumers of petroleum, natural gas, and electricity on a nationwide basis.