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 2014. 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.
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 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 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 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
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 2500 2000 thousand barrels per day 1500 1000 500 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 65 60 55 50 45 40 35 30 25 20 15 DAYS OF DISTILLATE SUPPLIES Current Year Prior Year
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 $1.70 215 210 205 200 195 190 185 180 175 170 DIESEL SWAPS Mid Continent Group 3
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 Current Year Prior Year 155 135 115 95 75 55 35 15
TOTAL PROPANE SUPPLIED (DEMAND) 7000 6000 5000 thousand barrels per day 4000 3000 2000 1000 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 $0.85 $0.80 $0.75 per gallon $0.70 $0.65 $0.60 $0.55 $0.50 18 Apr 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 22 Jan 22 Apr JLY 22 22 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