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Energy/Ethanol Outlook: Use crude pullback to book fall fuels

Propane may not get much cheaper this summer despite abundant supply.

Fundamentals of supply and demand continue to suggest petroleum markets have plenty of downside potential. But farmers can’t dry corn or run harvest machinery on hope. A 15-cent pullback in diesel costs is an opportunity to lock in some of fall needs to guard against supply chain disruptions, either local or around the world.
 
This week’s pullback took Midwest prices back to the lowest level since mid-April. With wholesale benchmarks above $2, the expense isn’t cheap. But having tanks filled is better than having to scramble for supplies or paying through the nose if the market takes off again.
 
In June I recommend locking in a third of fall diesel needs. Lock in another third now unless you’re comfortable gambling on further reductions or want to get all your needs covered.
 
ULSD prices normally follow moves in crude oil, which helped trigger the pullback over the past two weeks. Just when crude prices hit $75 a barrel – their highest level since 2014 – the market retreated 11% on ideas Saudi Arabia would boost production more than expected. But futures stayed a penny above Tuesday’s lows today despite a much larger than expected increase in stocks last week.
 
In addition to a surge in imports caused by higher U.S. prices, domestic production hit another record last week, reaching 11 million barrels a day for the first time. But gasoline supplies nationwide fell and Midwest ULSD supplies were also lower on declining production. That helped firm the entire market.
 
Crude still looks overvalued – futures are about $3 above my average price forecast of just over $65, which implies costs could break towards $56 at some point yet this year. But the timing of any move is difficult to predict given all the moving parts in the market. And the tricky Middle East situation could always spiral out of control, spiking the futures higher.
 
The other factor arguing for booking some fuel now is demand. Agricultural usage increases into harvest, which typically boosts Midwest cash prices more than futures delivered in New York Harbor. This strengthening basis can mitigate some or all of a break in the futures market.
 
Some propane fundamentals are also bearish. Production is up around 5% year-on-year and stocks have rebounded back to average levels as the build into the heating season catches hold. But prices have a seasonal tending to keep rising into fall, so the current dip is a chance to secure inventory. I previously recommended booking half of fall drying needs; growers should complete securing supplies now.
 
The latest energy report contained positive news on ethanol. Production bounced back to 1.064 million barrels a day last week, with blenders needing more for the increased supply of gasoline. The boost suggests USDA may be too as much as 30 million bushels too low on its forecast for corn usage to make the biofuel, even after upping its projection by 25 million barrels in the July 12 supply and demand report.
 
The increase explains why plants boosted basis by to a dime on corn in some areas last week in order to keep plants humming.

 

 

Download a complete version of the outlook with extensive charts and analysis using the Download button at the end of this report. 

Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

 

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