Diesel prices at multi-year highs mean pain at the pump

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1 Diesel prices at multi-year highs mean pain at the pump Conflicting signals from Wall Street keep commodity prices unsettled By Bryce Knorr, senior grain market analyst Headline news this week provided wildly conflicting signals about the direction of energy prices. But for growers filling up diesel tanks during an active planting period there was only pain at the pump. Midwest cash wholesale fuel prices continued their spring march upwards, reaching the highest level since While refineries in the region pumped out more ULSD than at any time so far in 2018, stocks ratcheted lower as demand from agriculture grew. Overall spring supplies of distillates nationwide are at their lowest point in five years, providing sound reasons for higher farm costs. The bullish tone to the product market included gasoline, which is also soaring as drivers are being warned to prepare for sticker shock this summer. That helped turn around a break in ethanol futures after today s petroleum report showed a surge in production last week, building stocks. The move in ethanol is not unusually seasonally, either, as more of the biofuel is needed for blending during the peak summer driving season. Strong demand could burn through more corn as well. Figures released this week showed increased demand in March, suggesting USDA may be 10 million bushels or so too low in its current forecast for usage by ethanol plants. Corn could face competition from sorghum, however. Strong exports of that feed grain to China minimized conversion to fuel earlier in the year. But Chinese penalties on sorghum imports lowered prices, diverting some supply to a Texas ethanol plant. Growers looking for cheaper prices to book fall needs will have to be patient, and there s no assurance that patience will be rewarded. One story making the rounds this week talked up potential for $300 crude, another cited Goldman Sachs advice for investors not to be scared of investing in commodities. Meanwhile, the U.S. faces a decision whether to continue with the Iran nuclear agreement. Rejection of that deal could mean more sanctions and less oil, or new conflicts that ratchet up tensions even more. Either is bullish for prices. At the same time the dollar moved to a new 2018 high today after the Federal Reserve s latest statement on monetary policy kept the central bank on track for two and possibly three more interest rate hikes this year. Stronger rates tend to buoy the greenback, pressuring dollar-denominated commodities like crude. But the market firmed anyway today despite the strong currency and a larger than expected increase in inventories as U.S. production continues to set records on a weekly basis. My models suggest fuel prices could have another 10 cents upside, more if the market gets crazy. The best bet for buying opportunities would come this summer if the financial market melts down on a black swan event. It doesn t take much imagination to come up with scenarios for that. That could also provide a chance to lock in fall drying fuel needs. Propane is following crude higher though inventories are starting to cut their deficit from year ago levels a little. I previously recommended locking in a third of the propane needed for fall drying. Use any move by the Conway, Kansas benchmark back to 60 cents to finish buying supplies.

2 net position long/short Crude Oil Futures and Options Managed Money Crude Oil Futures $ $ $ $ $ $20 0 1/1/2014 7/1/2014 1/1/2015 7/1/2015 1/1/2016 7/1/2016 1/1/2017 7/1/2017 1/1/2018 $0 Source: CFTC, NYME Crude Oil Commitment of Traders - Crude Oil ,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 - Crude Oil Open Interest

3 U.S. CRUDE OIL PRODUCTION AND RIG COUNTS Production Rig Counts thousand barrels/day oil and gas rigs Source: U.S. EIA, Baker-Hughes U.S. CRUDE OIL STOCKS Current 5-Year Min. 5-Year Max. million barrels

4 Stocks WEEKLY ETHANOL PRODUCTION AND STOCKS Production thousand barrels /1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 9/1/17 11/1/17 1/1/18 3/1/ thousand barrels/day Ending stocks Daily Production 2.95 ETHANOL PRODUCTION GALLONS FROM EACH BUSHEL USED Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18

5 Average Corn Belt Ethanol Plant Margins $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $0.50 $1.00 Average Corn Belt Ethanol Prices $2.40 $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00

6 U.S. GASOLINE STOCKS 270 Current 5-Year Min. 5-Year Max. 250 million barrels DAYS OF GASOLINE SUPPLIES Current Year Prior Year

7 REFINERY CAPACITY UTILIZATION 100 Current Year Prior Year 95 per cent TOTAL PETROLEUM PRODUCT EXPORTS thousand barrels per day

8 thousand barrels MIDWEST DIESEL Stocks Production thousand barrels/day

9 MID CONTINENT DIESEL SEASONAL cents/gal /5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5 MID CONTINENT DIESEL SEASONAL BASIS $0.20 $ cents/gal $0.10 $0.05 $0.00 $0.05 $0.10 $0.15 $0.20 $0.25 7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5

10 330 GROUP 3 DIESEL SEASONAL /1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1 $0.15 $0.10 GROUP 3 DIESEL SEASONAL BASIS $0.05 $0.00 $0.05 $0.10 $0.15 $0.20 7/1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1

11 U.S. DIESEL STOCKS 180 Current 5-Year Min. 5-Year Max million barrels DAYS OF DISTILLATE SUPPLIES Current Year Prior Year

12 ENERGY FUTURES PRICE CURVE Crude oil $72 Crude oil Diesel $67 $62 $57 $52 $47 May 2018 May 2019 May 2020 May 2021 Diesel $2.15 $2.10 $2.05 $2.00 $1.95 $1.90 $1.85 $1.80 $1.75 $ DIESEL SWAPS Mid Continent Group 3

13 U.S. PROPANE STOCKS 115 Current 5-Year Min. 5-Year Max million barrels DAYS OF PROPANE SUPPLIES Current Year Prior Year

14 TOTAL PROPANE SUPPLIED (DEMAND) thousand barrels per day Spot propane prices vs Crude oil $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Mid-Continent Propane Crude Oil

15 Seasonal propane prices (Mont Belvieu, Texas) Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Av e rage Seasonal propane prices (Conway, Kansas) Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

16 CME Swaps Curve Mont Belvieu, TX wholesale price $0.85 $0.80 $0.75 per gallon $0.70 $0.65 $0.60 $0.55 $ Apr JLY Oct 19 Jan 19 Apr JLY Oct 20 Jan 20 Apr JLY Oct 21 Jan 21 Apr JLY Oct 22 Jan 22 Apr JLY Oct Source: CME Group $0.80 CME Swaps Curve Conway Kansas wholesale price per gallon $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 $0.45 Source: CME Group