A slow harvest appears to be spreading out demand for diesel, helping support prices despite more signs the market is trying to put in a seasonal top.
Strong exports of fuel and other petroleum products are also propping up prices. Diesel at Midwest wholesale markets is hovering near the highest levels in nearly 2 ½ years, Seasonal demand from farmers coupled with supply interruptions caused by hurricanes and a firm crude oil market combined to push costs higher.
Production at Midwest refineries fell more than 4% last week, after plants ramped up production and delayed maintenance to keep inventories filled when Gulf Coast output plunged. Midwest diesel stocks fell for the fifth straight week and are 11% behind year ago levels, when prices were 15% to 20% less.
Basis against Ultra Low Sulfur Diesel futures delivered in New York Harbor also stayed elevated at a time when it normally begins to weaken. But even if cash does begin to falter, buying opportunities could be two months or more away to refill tanks for spring.
Swaps suggest a 15-cent break in the cash market, but the pullback could be more, or less, depending on what happens to crude. Crude oil stocks dropped by 6.5 million barrels last week. U.S. crude oil production fell 11% as Hurricane Nate shut wells in the Gulf. Imports were also lower and exports higher, and refiners cut back usage as well.
International tensions also ratcheted crude futures towards the top of the summer and fall range at $52. Iraq seized some Kurdish oil fields, a reminder of what can go wrong in the region.
With cuts by OPEC and its allies holding so far and global demand improving, fundamentals suggest an average price of $55 a barrel in the year ahead. That translates into farmgate diesel prices around $2.25 a gallon – more in eastern areas where costs tend to be higher.
But current oil market volatility means a range of $42 to $70 could be seen, depending on how events play out.
Propane weakened a few cents this week, and is also showing signs of a seasonal top. Wholesale costs typically peak ahead of the winter heating season, but don’t put in lows until late in the winter or into early summer. Swaps show prices pulling back around 20 cents a gallon, but as with diesel, crude should have something to say about how the market trades.
Ethanol production bounced back last week, reaching its highest level in four weeks as plants came back on line to take advantage of increasing harvest supplies. Margins broke sharply due to weak ethanol prices, but stocks tightened a little, suggesting good demand and likely some exports. Whether or not plants are using more corn than forecast by USDA will depend on their efficiency, with the next crush report due Nov. 1.
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.