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Petroleum Market Commentary - December 16, 2019

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Prices Higher - Rig Count Higher – Speculation Higher - Production Lower - Stock Market Higher - Inventory Higher – Dollar Lower

DIESEL:

During the week ending December 13th, the spot month diesel futures price increased by 3.43 cents per gallon (+1.76%) while the deferred months increased by 0 to 4 cents per gallon making the forward pricing curve higher and more negatively sloped. The one year forward price ended the week at a 6.22 cent discount to the spot price, from a discount of 5.10 cents at the end of the previous week.

The level and slope of the diesel forward pricing curve indicates higher demand expectations and lower 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.

GASOLINE:

During the week ending December 13th, the spot month gasoline futures price increased by 1.58 cents per gallon (+0.96%) while the deferred months increased by 1 to 2 cents per gallon making the forward pricing curve higher and nearly unchanged in sloped. The one year forward price ended the week at a 9.99 cent discount to the spot price, from a discount of 10.15 cents and the end of the previous week.

The change in level and shape of the forward pricing curve indicates higher demand expectations and steady inventory levels with respect to supply and demand. Demand also includes speculation which was higher on the week.

ANALYSIS:

DEMAND:

Weekly US petroleum demand decreased by 12.95% during the week ending December 6th. Domestic demand is down by 2.36% vs. one-year ago and demand is currently 1.44% above the five year average.

PRODUCTION:

Domestic production decreased by 100,000 barrels per day down from its all-time high of 12.9 million barrels per day during the previous week. Domestic production is 10.34% above year ago levels. The number of operating oil drilling rigs in the US increased by 4 from 663 to 667, increasing for the first time in eight weeks. 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 4,372,000 barrels per day (+51.87%) since the low on July 1, 2016.









Below is the one-year chart of spot diesel futures prices as of Decemeber 13th.



Below is the one-year chart of spot gasoline futures prices as of December 13th.

MARKET FACTORS & COMMENTARY:

: :  Petroleum inventories increased on the week by 10.35 million barrels while inventories were expected to increase by 1.18 million barrels on the week. The five-year average inventory increased by 1.81 million barrels. Inventories increased vs. expectations and vs. the five year average.

: :  The US and China reached phase 1 of the trade agreement which is expected to be positive for economic growth rates globally which is positive for petroleum demand expectations and price.

: :  Phase 1 of the trade agreement along with an unexpected reduction in OPEC production targets is making the market tighter. Higher expected demand and lower expected supply means higher prices and higher speculation. However, these things need to actually come true. US shale production and other sources of crude can increase production relatively quickly in response to higher prices.

: :  The Stock market increased by +0.73% which is positive for general economic activity and is positive for petroleum prices and petroleum demand expectations.

: :  The US Dollar decreased by -0.54% 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 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 December 2019. The chart shows the expectation of a balanced to slightly surplus market over the next three quarters. This forecast indicates slightly less supply than the November forecast over the next year. This is generally positive for price. If we see the projected 800,000 barrel per day surplus in the second quarter of 2020, this will negatively affect price.

DECEMBER FORECAST



Below is the one-year chart of the US stock market as of December 13th.



Below is the one-year chart of the US stock market as of December 13th.



INVENTORIES:

During the week ended December 6th, total petroleum inventories increased by 10.35 million barrels vs. a five year average increase of 1.81 million barrels and vs. an expected increase of 1.18 million barrels. Inventories increased by 8.54 million barrels vs. the five year average and increased by 9.17 million barrels vs. expectations. Total inventories stand at 806.3 million barrels, up from 795.9 million barrels at the end of the previous week. The five year average inventory is 796.4 million barrels, up from 794.6 million barrels at the end of the previous week.

Current inventories are +1.24% versus the five year average, an increase on the week from +0.17%. This is the sixth week that inventories have been greater than the five year average and a four month high versus the five year average. This is negative for price.



SPECULATION:

As of December 10th, the net speculative long position in petroleum futures was 332,873,000 barrels, up 100,731,000 barrels (+43.39%) from the previous week to a seven month high. Speculation increased for the first time in two weeks week and represents 41.29% of domestic inventories. Speculation is 30.36% above its one year moving average. The corresponding spot month diesel futures price on December 10th was 196.55 cents per gallon, up 8.56 cents per gallon from the prior week.

Diesel fuel price and size of speculative net long position in petroleum are 72.03% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 51.89% of diesel fuel price movements are explained by changes in level of speculation. The one-year correlation decreased from the previous week.

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 255 million barrels, which is up 3 million barrels on the week.



CONTACT:

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.