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Energy/Ethanol Outlook: Drop in crude prices sparks chance to buy fuel

Start locking in diesel needed for harvest in turbulent market.

Last week I advised growers to “be on the lookout for opportunities to refill fuel tanks for harvest needs.”  That chance appears to be starting, thanks to bearish news from the U.S. to the Middle East.

The government Wednesday reported an unexpected increase in U.S. crude oil inventories along with a surge in supplies of gasoline and diesel. The build came despite only the second drop in production this year, causing crude oil futures to tumble more than $2 a barrel, with the nearby falling below $46.

ULSD futures followed suit, taking wholesale benchmarks along for the ride. The Group 3 price some dealers buy off of hit my intimal buying target of $1.40 a gallon, a place to book 25% of fall needs. Chicago is still higher, but plan to scale into purchases a both benchmarks with a goal of 100% protection at $1.30. This should take a typical farmgate prices to the $1.70 level.

This week’s weakness comes after more questions about the ability of OPEC and Russia to curtail production into 2018 as agreed. The latest threat came after Saudi Arabia cut ties to Qatar. Qatar, home to U.S. Central Command for the Middle East, shares a natural gas field with Iran, which was struck by its own terror attack today. Increased friction between Saudi Arabia and Iran, traditional rivals in the region, could cause the production cutbacks to unravel.

Growers shouldn’t be complacent about energy needs, however. For one thing, fundamentals favor higher prices. The latest estimates from the government out this week point to lower global and U.S. stocks, despite the potential for the U.S. to pump more. Demand projections are increasing, further tightening inventories into 2018, adding $2 to my forecast for 2017 prices, which are running at $52.50, with 2018 a dollar higher than that.

Crude prices are never average for long, of course. Crude could trade in a range of $44 to $61 over the summer

Anxieties face three flashpoints this week, with British elections, a meeting of the European Central Bank and testimony of former FBI director James Comey before Congress. Then next week comes a meeting at the Federal Reserve, which is expected to raise interest rates again.

Propane is also following the break in crude but downside may be limited. Supplies are at five-year lows as they build seasonally.

Growers following my recommendations already booked 50% of their anticipated drying needs when prices were lower in March. Wholesale benchmarks may not have a lot of downside below 55 cents unless outside events intervene. That would be a place to complete purchases for fall.

Ethanol margins improved noticeably last week on better cash ethanol prices, and today’s report from the government showed why. Plants cut back production to under 1 million barrels a day, tightening stocks. That kept ethanol prices futures firm today despite the setback in the petroleum sector. Today’s reduction in output makes an increase in USDA’s estimate of corn usage a little less likely from Friday’s supply and

Download the complete report using the Download button below.

 

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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