The dead of winter normally is a good time for growers to buy fuel they’ll need to get crops up and growing in the spring. But instead of cooling off, the energy market heated up, which could limit buying opportunities.
The counter-seasonal rally could break, but playing chicken with energy carries more than just price risk. Supply chains can break at almost any time. Refineries and pipelines blow up and spring floods swamp barges and rail lines. This winter low water on the river system could also be a problem, along with the aging lock-and-dam system.
Midwest diesel stocks were slow to rebuild after harvest use ended. They finally began to turn higher after Thanksgiving, but still lagged 12.5% below levels from the start of 2017. Not surprisingly, wholesale cash diesel benchmarks are 40 to 50 cents higher, trading at three-year highs.
Rising inventories so far haven’t dented the diesel bull market, in part because crude oil still shows no signs of ending its run. OPEC and its allies agreed in November to extend production cuts through 2018. A series of production problems in the North Sea and Libya added to a rebound in consumption fueled by stronger economic growth. A brutal cold snap didn’t hurt either, while domestic troubles in Iran also factored into risk premiums, though oil output hasn’t suffered.
Crude topped $64 a barrel after the government reported lower stocks in the U.S. for the eighth straight week. Crude oil production dropped in the U.S. as some rigs went out of production, despite prices that are at profitable levels.
Crude now looks like it could average $58 a barrel in 2018, with potential for rallies to $70. Prices should eventually break on rising U.S. production and perhaps a stock market selloff or two, but that retreat may come after fuel tanks need filling. Red diesel already tops $2.50 a gallon in some Midwest markets and could have another 20 cents upside if the crude rally doesn’t stall.
The rally in energy is providing a few side benefits for corn growers, keeping ethanol at enough of a premium to gasoline to encourage higher blends. But ethanol production, which set a weekly record in December, suddenly could use a lifeline too. Production dropped 3.5% last week, falling below 1 million barrels a day for the first time since October.
Margins at plants remain negative, and lately they’ve been hurt by higher costs for natural gas used to run operating systems. That may in part be responsible for the production drop off the last two weeks.
Even the only bright spot in the energy complex is only a flicker right now. Propane prices at wholesale benchmarks dropped nine to 10 cents this week. Crude generally follows the trend in crude except during the heating season, which rallied the market into the New Year’s cold snap.
Production rose 5% in 2017 thanks to the boom in energy drilling. But demand rose more because the U.S. is exporting more of its newfound supply.
The best time to buy propane is normally at the end of winter or into the spring and summer. The January break could be the beginning of that move, but getting farmgate propane below $1.20 may be difficult.
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.