Catching a falling knife in any commodity market isn’t easy. But that’s a worry for speculators. Farmers are hedgers and they’ll need plenty of fuel to run machinery and dry crops in 2019. It’s time to take advantage of a steep drop in energy prices to start booking diesel and propane for the coming year.
To be sure the collapse in crude may not be over. And diesel stocks are just starting to rebuild in the Midwest after a slow harvest dragged out demand, which could weaken basis in the product market. But there’s risk to the upside, too. And in any case fuel prices trading around the lowest levels of 2018 likely are a value.
Booking diesel should be easier. Start with 50% of anticipated spring and early summer needs. Midwest wholesale benchmarks resisted some of the 35% downdraft in crude oil prices until last week, when they plunged more than 20 cents a gallon. With prices lower again today they’re down 25% from October highs. It’s not buy one, get one free, but it’s close enough.
Crude oil faces a potential turning point over the next week. OPEC and its allies gather Dec. 6 with production cuts again on the table. Saudi Arabia reportedly is pushing for reinstatement of curbs that rallied the market from multi-year lows reached in 2016. Nigeria and Russia stand in the way of a deal at the moment, and of course the situation is mired in more than energy. Both Saudi Arabia and Russia have complex relationships with President Trump, who has pressed them for lower crude prices. The situation is compounded by the murder of the dissident Saudi journalist and now Russia’s new flare-up with Ukraine. Iran also is a factor, after the U.S. granted waivers from some of the sanctions the U.S. reimposed earlier this month. It’s a giant game of Risk with maybe Let’s Make A Deal and The Price Is Right added for fun.
U.S. crude production continues to run at record levels, widening the gap between U.S. and world prices and helping achieve record petroleum exports in the latest week. There are signs lower crude prices may be hurting drillers too, as the number of rigs in production dropped last week from the highest level since March 2015. Total crude supplies increased by 1.6 million barrels last week, less than some feared, thanks to another boost from stocks withdrawn from the Strategic Petroleum Reserve. That stockpile is down 9.4 million barrels so far this fall.
A sign of the market’s uncertainty can best be seen in the cost of crude options. Implied volatility traded above 50% today, three times the level currently in the corn market.
Slowing global economic growth could keep demand in check, another factor restraining prices. Based on current supply and demand fundamentals, crude looks fairly valued around $60, which would put the low for the next month right around the $50.10 level hit after Monday.
It’s a little early for a low in diesel prices, but not by much. A sharp drop in basis this week is another sign the time may be right.
Buying propane this early won’t be easy, and benchmark prices are still above the sub-60-cent level I recommended earlier in the month. But swaps for June on the Conway, Kansas hub price settled Tuesday at 56.8 cents a gallon – talk to you dealer or futures broker about using these for hedges on 50% of fall drying needs.
Ethanol trade got a little positive news today. Production increased a little last week, but stocks built too, dropping prices back near decade-lows hit in August. Projected corn usage for ethanol is running around 1% below last year – more data comes out Monday on that – which could make it difficult to reach USDA goal for the 2018 marketing year without a push from E15 next summer.
- Source: Farm Future -