It s time to start buying propane for fall Expect to pay more to dry 2017 corn crop By Bryce Knorr, senior grain market analyst It s the end of winter hopefully and that means it s a good time to buy coats, long underwear and propane. While growers can expect to pay around 10 cents more a gallon for drying fuel than they did last year, prudence suggests getting some coverage in place to guard against volatility in the petroleum market and a seasonal move higher. Earlier in March when prices dipped I recommended booking 25% of needs. While a downdraft in crude oil could knock prices lower this summer, bump coverage up to 50% if supplies are available at a fair cost. Wholesale benchmarks are running around 55 to 59 cent cents for comparison. The end of winter traditionally is the best time to buy propane, but this trend has been skewed recently by both rising production and outside market volatility. Summer prices have been cheaper when crude oil crashed as it did last year on Britain s surprise vote to leave the EU, for example. There s plenty of potential for those types of gyrations again this year as world events unfold. But while U.S. production of propane continues to increase, so does demand, especially exports. That lowered U.S. inventories by a third compared to the previous year. Stocks normally rebuild over summer into fall for the start of the heating season, but prices typically rise too. Seasonal trends are also in play in the diesel market as demand from agriculture builds for spring fieldwork and planting. Wholesale diesel costs in the Midwest have stayed in a narrow range of about a dime so far in 2017, reflecting the rangebound trade in crude oil. Midwest supplies were down last week for the third week in a row, helping firm basis between cash and ULSD settled in New York Harbor. That too is a typical pattern for spring. Basis should begin to weaken into summer once farmers are done burning fuel, which is normally the best time to book diesel for harvest. But any swoon in the crude oil market could also be a buying opportunity. Red diesel seems reasonably priced right now given seasonal demand and the rest of the petroleum complex. Crude rallied more than $1 a barrel Wednesday after the government reported a smaller than expected increase in inventories last week. While supplies are at record levels, the U.S. continues to ramp up exports while production cuts from OPEC and its allies may be extended later this year. Disruptions out of producers in volatile parts of the world like North Africa and the Middle East are also encouraging some buying. Current fundamentals of supply and demand suggest a crude price around $50.50 a barrel according to my model, $1 above Wednesday s close. But that also means oil could range between $65 and $29 over the next year. The rally in crude Wednesday helped turn around the ethanol market. Prices there broke after the government said inventories built last week on rising production spurred by better margins. That s allowed plants to start pushing bids to attract bushels from farmers reluctant to sell with futures prices at lows for the year. Continued strong production means USDA could still be too low on its estimate of corn usage for the 2016 crop. Data on corn grindings for February and January ethanol production comes out next week that should shed more light on trend.
Days of Crude Oil Supplies 40 Current Year Prior Year 35 30 25 20 15 U.S. Crude Oil Stocks 550 Current 5-Year Min. 5-Year Max. 500 million barrels 450 400 350 300 250
net position long/short 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 Crude Oil Futures and Options Managed Money Crude Oil Futures 1/1/2014 1/1/2015 1/1/2016 1/1/2017 Source: CFTC, NYME $120 $100 $80 $60 $40 $20 $0 Crude Oil Commitment of Traders - Crude Oil 160 140 120 100 80 60 40 20 0 2007 2009 2011 2013 2015 2017 2,500,000 2,000,000 1,500,000 1,000,000 500,000 - Crude Oil Open Interest
Weekly Ethanol Production and Stocks Stocks Production 24000 1100 thousand barrels 23000 22000 21000 20000 19000 18000 1050 1000 950 900 850 thousand barrels/day 17000 800 9/1/14 2/1/15 7/1/15 12/1/15 5/1/16 10/1/16 3/1/17 Ending stocks Daily Production 3.00 2.95 2.90 2.85 2.80 2.75 2.70 2.65 Ethanol production (gallons) from each bushel of grain used 2.60 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17
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 Midwest Diesel thousand barrels 40000 35000 30000 25000 20000 15000 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 thousand barrels/day Stocks Production
330 Mid Continent Diesel Seasonal 2006 2013 2015 2016 2016 2017 280 cents/gal 230 180 130 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 $0.40 Mid Continent Diesel Seasonal Basis 2006 2013 2015 2016 2016 2017 $0.30 $0.20 cents/gal $0.10 $0.00 $0.10 $0.20 $0.30 7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5
380 330 Group 3 Diesel Seasonal 2008 2013 2015 2016 2016 2017 2014 2015 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 $0.25 $0.20 Group 3 Diesel Seasonal Basis 2008 2013 2015 2016 2016 2017 $0.15 $0.10 $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 55 Current Year Prior Year 50 45 40 35 30 25 20 15
Crude oil $51 Energy Futures Price Curve Diesel $1.70 $50 $1.65 $49 $1.60 $48 $1.55 $47 $46 Crude oil Diesel $1.50 $1.45 $45 20 APR 2017 20 APR 2018 22 APR 2019 21 APR 2020 $1.40 Diesel Swaps Chicago Group 3 163 161 159 157 155 153 151 149 147 145
115 U.S. Propane Stocks Current 5-Year Min. 5-Year Max. 105 95 million barrels 85 75 65 55 45 35 25 Days of Propane Supplies 135 Current Year Prior Year 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 Mid-Continent Propane Crude Oil $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0
Ave rage 2017 Seasonal propane prices (Mont Belvieu, Texas) Average 2016 2017 100 90 80 70 60 50 40 30 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Seasonal propane prices (Conway, Kansas) Ave rage 2017 100 Average 2016 2017 90 80 70 60 50 40 30 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
CME Swaps Curve Mont Belvieu, TX wholesale price $0.64 $0.62 $0.60 per gallon $0.58 $0.56 $0.54 $0.52 $0.50 MAR 17 17 May JLY 17 17 Sep 17 Nov 18 Jan 18 Mar 18 May JLY 18 18 Sep 18 Nov 19 Jan 19 Mar 19 May JLY 19 19 Sep 19 Nov 20 Jan 20 Mar 20 May JLY 20 20 Sep 20 Nov Source: CME Group $0.63 CME Swaps Curve Conway Kansas wholesale price $0.61 $0.59 $0.57 per gallon $0.55 $0.53 $0.51 $0.49 $0.47 $0.45 Source: CME Group