Trump s war on OPEC Farm fuel prices resist President s attempt to jawbone cartel By Bryce Knorr, senior grain market analyst For a day or two, at least, it looked like President Trump s attempt to tweet energy prices lower might work. REDUCE PRICING NOW! was his all-caps Twitter message to OPEC on Independence Day. Prices indeed dropped on Thursday, aided by a surprise increase in crude oil supplies caused by stronger imports. But today s reversal higher by crude suggests the President may need a stick bigger than social media to lower prices. While Saudi Arabia and Russia appear ready to increase production, it s unclear whether that will be enough to offset ongoing losses from Venezuela and Libya, and reduced exports from Iran caused by renewed U.S. sanctions. Iran had threats of its on Twitter, suggesting it would block the crucial Straits of Hormuz a choke point for 20% of the world s crude shipments. While the U.S. Navy would have something to say about any such effort, the war of words didn t convince traders to abandon long positions just yet. Money managers began buying crude again last week, adding more than $5 billion in futures and options to their portfolios. The move back higher in crude came at a time when Midwest cash diesel prices bucked a short move lower. Midwest diesel supplies dropped last week despite rising production in the region, falling to their lowest level since the start of the year. Normally summertime sees stocks building as agricultural use slows down. But refineries have been buying inventory off the market to fulfill contracts, an indication they can t keep up with demand. That s keeping basis firm against ultra-low sulfur diesel futures delivered in New York Harbor. Fundamentals of supply and demand aren t the problem for propane prices. They re up a dime from June lows despite an increase in stocks above year-ago levels. Propane often ignores the fundamentals of its market to follow crude, which it competes with as an industrial feedstock. Propane prices usually confirm a post-winter low in July, then move higher to build inventories for winter. As a result, farmers hoping for lower prices on farm fuels for running harvest equipment or drying crops may have to either be patient risking a move higher still or bite the bullet and lock some of their needs in now. The best argument for a pullback in prices likely would come from turbulence in other markets a meltdown on Wall Street caused by any one of any number of potential threats: trade wars, Brexit, political instability, etc. Crude oil continues to be fairly valued around $65 a barrel according to my model based on supply and demand. Based on that prognosis and current conditions, prices have hit their projected high for the quarter, though a move to $83 couldn t be ruled out in a worst-case scenario. In June I recommend locking in a third of fall diesel needs. Any pullback now should be used to complete pricing. That goes for propane too. I previously recommended locking in half the propane needed for fall drying. Higher energy prices do have a silver lining, lending support to the ethanol industry. Though production dipped slightly last week, it appears USDA may be 25 to 50 million bushels too low on its estimate of corn usage. Plants were more efficient in May but prices of the biofuel are competitive for blending as gasoline demand peaks for the summer driving season.
net position long/short 600000 Crude Oil Futures and Options Managed Money Crude Oil Futures $120 500000 $100 400000 $80 300000 $60 200000 $40 100000 $20 0 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 $0 Source: CFTC, NYME/CME Crude Oil Commitment of Traders - Crude Oil 160 140 120 100 80 60 40 20 0 2007 2009 2011 2013 2015 2017 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 - Crude Oil Open Interest
12000 10000 U.S. CRUDE OIL PRODUCTION AND RIG COUNTS Production Rig Counts 2500 2000 thousand barrels/day 8000 6000 4000 2000 1500 1000 500 oil and gas rigs 0 2014 2015 2016 2017 2018 Source: U.S. EIA, Baker-Hughes 0 550 U.S. CRUDE OIL STOCKS Current 5-Year Min. 5-Year Max. million barrels 500 450 400 350 300 250
Stocks 25000 24000 WEEKLY ETHANOL PRODUCTION AND STOCKS Production 1150 1100 thousand barrels 23000 22000 21000 20000 19000 18000 17000 9/1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 9/1/17 11/1/17 1/1/18 3/1/18 5/1/18 1050 1000 950 900 850 800 thousand barrels/day Ending stocks Daily Production 2.95 ETHANOL PRODUCTION GALLONS FROM EACH BUSHEL USED 2.90 2.85 2.80 2.75 2.70 2.65 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18
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
U.S. GASOLINE STOCKS 270 Current 5-Year Min. 5-Year Max. 250 million barrels 230 210 190 170 150 DAYS OF GASOLINE SUPPLIES 33 31 29 27 25 23 21 19 17 15 Current Year Prior Year
REFINERY CAPACITY UTILIZATION 100 Current Year Prior Year 95 per cent 90 85 80 75 TOTAL PETROLEUM PRODUCT EXPORTS 7000 6000 5000 thousand barrels per day 4000 3000 2000 1000 0
thousand barrels 40000 35000 30000 25000 20000 15000 MIDWEST DIESEL Stocks Production 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 thousand barrels/day
MID CONTINENT DIESEL SEASONAL 330 2006 2013 2017 2018 2016 2017 280 230 cents/gal 180 130 80 7/5 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 $0.15 2006 2013 2017 2018 2016 2017 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
330 GROUP 3 DIESEL SEASONAL 2008 2013 2017 2018 2016 2017 280 230 180 130 80 7/1 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 2008 2013 2017 2018 2016 2017 $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
U.S. DIESEL STOCKS 180 Current 5-Year Min. 5-Year Max. 160 140 million barrels 120 100 80 60 40 DAYS OF DISTILLATE SUPPLIES 65 60 55 50 45 40 35 30 25 20 15
Crude oil $77 ENERGY FUTURES PRICE CURVE Diesel $2.30 $72 $2.20 $67 $2.10 $62 $2.00 $57 Crude oil Diesel $1.90 $52 $1.80 $47 Jul 2018 Jul 2019 Jul 2020 Jul 2021 $1.70 225 DIESEL SWAPS Mid Continent Group 3 220 215 210 205 200
U.S. PROPANE STOCKS 115 Current 5-Year Min. 5-Year Max. 105 95 million barrels 85 75 65 55 45 35 25 175 DAYS OF PROPANE SUPPLIES 155 135 115 95 75 55 35 15
TOTAL PROPANE SUPPLIED (DEMAND) 2500 2000 thousand barrels per day 1500 1000 500 0 Spot propane prices vs Crude oil $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Mid-Continent Propane Crude Oil
Seasonal propane prices (Mont Belvieu, Texas) 2017-2018 2018 2017 Average 110 100 90 80 70 60 50 40 30 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 66 64 62 60 58 56 54 52 Av e rage 2017 110 100 90 80 70 60 50 40 30 Seasonal propane prices (Conway, Kansas) Average 2018 2017 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
CME Swaps Curve Mont Belvieu, TX wholesale price $1.00 $0.95 $0.90 $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 JLY 18 18 Oct 19 Jan 19 Apr JLY 19 19 Oct 20 Jan 20 Apr JLY 20 20 Oct 21 Jan 21 Apr JLY 21 21 Oct per gallon 22 Jan 22 Apr JLY 22 22 Oct Source: CME Group per gallon $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 $0.45 CME Swaps Curve Conway Kansas wholesale price Source: CME Group