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Speculation Up - Prices Mixed - Rig Count Up - Production Down
During the week ending December 23rd, the spot month diesel futures price decreased by 0.95 cents per gallon (-0.57%) while the deferred months changed by +1 to -1 cents per gallon making the forward pricing curve relatively unchanged in level and slope. The one year forward price ended the week at a 10.76 cent premium to the spot price, from a premium of 8.97 cents at the end of the previous week.
The level and slope of the diesel forward pricing curve indicates steady demand expectations and higher inventories with respect to demand. Demand includes speculative demand which increased 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 23rd, the spot month gasoline futures price increased by 6.91 cents per gallon (+4.44%) while the deferred months increased by 2 to 6 cents per gallon making the forward pricing curve higher and negatively sloped over the next several years. The one year forward price ended the week at a 3.85 cent discount to the spot price, from a premium of 0.56 cents and the end of the previous week.
The change in level and shape of this forward pricing curve indicates higher demand expectations and lower inventory levels with respect to supply and demand. Demand includes speculative demand which was higher on the week.
The US dollar was higher on the week which is negative for price. Inventories on the week were lower which is positive for price. The stock market, as a proxy for demand expectations, was slightly higher which is positive for price. Speculation was higher on the week which is positive for price. US domestic crude production was lower which is positive for price. Domestic production is down 4.28% on a year over year basis. Oil rig count indicating the number of oil wells currently being developed by drilling was higher on the week which is negative for price.
Weekly US petroleum demand increased by 13.40% during the week ending December 16th. Domestic demand is down 1.26% vs. one-year ago and demand is currently 2.14% below the five year average.
Domestic production decreased for the first time in two weeks and is 4.28% below year ago levels. The number of operating oil drilling rigs in the US increase by 13 and stands at 523. This is 207 more than the recent low of 316 and 67.50% lower than the peak of 1609 in October 2014. This is a new eleven-month high rig count. A higher rig count is negative for price. The increasing rig count is causing US production to stabilize and grow as the global rebalancing of supply and demand continues. US domestic production has decreased by 433,000 barrels per day since the beginning of the year and 824,000 barrels per day since the peak of 9.61 million barrels per day in June 2015.
Below is the one-year chart of spot diesel futures prices as of December 23rd.
Below is the one-year chart of spot gasoline futures prices as of December 23rd.
MARKET FACTORS & COMMENTARY:
: : Inventories decreased by 1.47 million barrels while inventories were expected to decrease by 2.47 million barrels on the week. The five-year average inventory increased by 2.21 million barrels. Inventories decreased vs. the five year average and increased vs. expectations.
: : The Stock market decreased by +0.25% which is positive for economic and petroleum demand expectations and prices.
: : The US Dollar increasing by +0.06% on the week is negative 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.
SUPPLY & DEMAND:
The charts below show supply and demand history and expectations for November and December. Supply and demand are in the process of re-balancing which is the main cause of steady to higher price levels over the past 6 months.
Below is the one-year chart US stock market prices as of December 23rd.
Below is the one-year chart for the US dollar index as of December 23rd.
During the week ended December 16th, total petroleum inventories decreased by 1.47 million barrels vs. a five year average increase of 2.21 million barrels and vs. an expected decrease of 2.47 million barrels. Inventories decreased by 3.69 million barrels vs. the five year average and increased by 1.00 million barrels vs. expectations. Total inventories stand at 867.7 million barrels, down from 869.2 million barrels at the end of the previous week. The five year average inventory is 709.9 million barrels, down from 707.7 million barrels at the end of the previous week.
Current inventories are 22.23% higher than the five year average, down from +22.82% at the end of the previous week.
Speculation rises to a new 29 month high.
As of December 20th, the net speculative long position in petroleum futures was 376,441,000 barrels, up 7,695,000 barrels (+2.09%) from the previous week. Speculation increased for the fifth week and represents 43.38% of domestic inventories. Speculation is 79.27% above its one year moving average. The corresponding spot month diesel futures price on December 20th was 166.88 cents per gallon, down 0.59 cents from 167.47 cents per gallon during the previous week.
Diesel fuel price and size of speculative net long position in petroleum are 79.82% correlated over the past 52 weeks indicating that, on a statistical basis over the past year that 63.71% of diesel fuel price movements are explained by changes in level of speculation.
The net speculative long position has been variable over the past year ranging between 63 million and 377 million barrels with an average of about 210 million barrels, which is up about 6 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 20th, the market price for spot month diesel futures is estimated to be 130.35 versus the actual price of 166.88. This indicates that the market is currently overvalued by 36.53 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.