High fuel costs could last Diesel and propane may not get much cheaper in 2019 By Bryce Knorr, senior grain market analyst 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.
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 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
thousand barrels/day U.S. CRUDE OIL PRODUCTION AND RIG COUNTS 12000 Production Rig Counts 10000 8000 6000 4000 2000 0 2014 2015 2016 2017 2018 Source: U.S. EIA, Baker-Hughes 1800 1600 1400 1200 1000 800 600 400 200 0 oil and gas rigs 550 U.S. CRUDE OIL STOCKS Current 5-Year Min. 5-Year Max. million barrels 500 450 400 350 300 250
Stocks 25000 WEEKLY ETHANOL PRODUCTION AND STOCKS Production 1150 thousand barrels 24000 23000 22000 21000 20000 19000 18000 1100 1050 1000 950 900 850 thousand barrels/day 17000 800 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 7/1/18 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 2018 2019 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 2006 2013 2017 2018 2018 2019 $0.15 $0.10 cents/gal $0.05 $0.00 $0.05 $0.10 $0.15 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 2018 2019 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 2018 2019 $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 $72 $67 ENERGY FUTURES PRICE CURVE Diesel $2.30 $2.20 $62 $2.10 $2.00 $57 $52 Crude oil Diesel $1.90 $1.80 $47 Aug 2018 Aug 2019 Aug 2020 Aug 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 25 175 155 135 115 95 75 55 35 15 DAYS OF PROPANE SUPPLIES
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 110 2018 2017 Average 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 Average 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 18 Aug 18 Nov 19 Feb 19 May 19 Aug 19 Nov 20 Feb 20 May 20 Aug 20 Nov 21 Feb 21 May 21 Aug 21 Nov 22 Feb 22 May 22 Aug 22 Nov per gallon Source: CME Group CME Swaps Curve Conway Kansas wholesale price per gallon $0.95 $0.90 $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 $0.45 Source: CME Group