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Energy/Ethanol Outlook: High fuel costs could last

Diesel and propane may not get much cheaper in 2019.

In July I recommended using a dip in the energy market to lock in propane for fall drying and step up diesel coverage to two-thirds of harvest needs. Despite a modest pullback in crude oil Wednesday, those prices look cheap compared to where the petroleum market is at today. For buyers needing fuel, bargains may be hard to come by. And the pain at the pump could continue into 2019.

Based on current fundamentals of global supply and demand, crude oil could average $64.67 next year, just $1.50 cheaper than in 2018. That means farmgate diesel could average nearly $2.50 a gallon in 2019. And without a prolonged downturn in crude, costs may not get much lower than that to provide real buying opportunities. 

Of course, crude is a volatile market that trades in wide ranges some years. It’s traded in a range of $17 this year but lows were made in February. Since then, futures have risen more or less steadily depending on the news flow out of OPEC and its allies.

China swung the market this week. New retaliatory sanctions were expected to be placed on imports of U.S. crude and trade data showed Chinese imports already slowing in July. But the U.S. is such a major producer now that China couldn’t ignore our supply. It sanctioned products like diesel and gasoline, but not the crude its refineries need.

Saudi Arabia also appears to be having trouble boosting production and trouble spots remain around the world, including Libya and Venezuela. The latest forecasts show world inventories tightening more in the year ahead, making pullbacks difficult until the news flow turns bearish. A meltdown in financial markets could accomplish that goal. But U.S. sanctions on Iran and Russia may make it harder for those countries to operate, though both desperately need petrodollars.

A warm El Nino winter in the U.S. could ultimately benefit growers if less heating oil gets burned, increasing supplies of distillates. Winter normally is the best time to book diesel anyway because farmers here aren’t using as much.

In the short run, weather could cut the other way. Hurricane Harvey disrupted supplies of fuel from the Texas Gulf a yea ago, and its impact is still being felt in the propane market. The Texas benchmark for propane continues to run nearly 20 cents a gallon higher than costs out of the Conway, Kansas hub. Propane appears to making its seasonal run higher into the heating season, with only limited buying opportunities available now. 

The strong feel to the petroleum market has helped growers on the revenue side of their income statements. Ethanol remains at a significant discount to gasoline, supporting blending and keeping production strong. Plants churned out near-record amounts of the biofuel last week, though that increased supplies and kept ethanol prices on the defensive.

 

 

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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