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Energy/Ethanol Outlook: Fuel costs rise despite slow start to spring

Crude oil rallies despite rising U.S. production.

If you still need to buy fuel for spring, get ready for pain at the pump. Don’t blame profiteering oil companies – there are plenty of reasons petroleum prices are expensive this spring. 

Start with supply and demand fundamentals. Stronger growth in the U.S. and around the world is encouraging consumption, with gasoline getting a kick as the peak summer driving season approaches. While agricultural demand is slowed by cold, wet spring weather, nationwide supplies of distillates fell last week. Midwest inventories edged higher, however, on weather and strong output from refineries. 

OPEC and its allies have exercised discipline in maintain their cuts to output, though U.S. production grew again last week with more rigs coming into production.

It’s been a while since Middle East tensions played a role in prices. But with the U.S. and its allies preparing to lob missiles at Syria over its gas attack, that’s certainly ratcheted up fears of disruptions.

A weak dollar also plays into higher prices of commodities denominated in the greenback. Whether it’s fears of trade wars or rising inflation, investors are interested in commodities again. Money managers sold off some of their record holdings in crude oil as prices slumped. But as prices firm above $66 a barrel, they’re stepping back in. 

Midwest diesel prices jumped a dime already this week, and are trading15 to 25 cents off recent lows. Basis in Chicago against futures delivered in New York harbor is also firming, an indication of seasonal demand from agriculture. I previously recommended locking in spring needs if possible.

Fundamental models of supply and demand mirror this uncertainty, showing a wide range of possible outcomes. That reflects the high cost of options on crude, which raised implied volatility above 28% this week.

Price curves across the board from crude to diesel to propane don’t show much softening. For crude, futures point to average prices above $60 this year, the midpoint from my models. That means crude could take a run at $70 this spring.

What comes up also goes down, and a stock market rout or other bearish event could take crude below $60 again, perhaps down to the low 50s, or in an extreme event, the 40s. Pullbacks would be buying opportunities for fall, if they happen.

Propane tends to follow crude, and after a brief decline below 60 cents a gallon, the Conway, Kansas wholesale hub prices is higher. Swaps don’t show any retreat into summer, though one has come the last couple of years on stock market meltdowns. I previously recommended locking in a third of the propane needed for fall drying; lock in another third if the Conway price gets back below 60 cents.

Increasing summer gasoline demand should be good for ethanol usage, which remains above levels implied by USDA’s forecast, which should raise corn demand a little. Ethanol remains competitively priced for blending, though higher corn prices hit plant margins last week, so they curtailed production. That in turn drew down stocks, helping prices rally today. Basis at ethanol plants remains erratic, so lock for pushing to spot hedges on old crop inventory.

 

 

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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