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Brace for higher gas, diesel and energy bills

Ag Marketing IQ: Production cuts in Saudi Arabia and Russia mean crude oil could climb to $100 a barrel by Christmas.

Naomi Blohm, senior market adviser

September 7, 2023

6 Min Read
Oil field at sunset
Getty Images

Crude oil futures have rallied over the past week on news that lower global production will continue into year end. After trading in a very cautious sideways pattern since November of 2022, crude oil futures finally broke out of that range to the upside.

Just one month ago, I alerted you to the possibility of a rally in the crude oil market based on technical chart formations. However, a catalyst was needed to make that rally occur.

What’s happened

The crude oil market had been waiting for fresh fundamental news to dictate a reason for prices to break out of that modest trading range.

For nearly one year, trade was waiting to see what that fundamental catalyst would be, and what that news would mean to crude oil prices.

The primary catalyst for the price break higher was news of continued lower global crude oil production as Saudi Arabia and Russia have yet again extended their production cuts. Initially, these supply cuts were supposed to end in September. However, Saudi Arabia and Russia agreed recently to extend their voluntary crude oil production cuts until the end of 2023. By taking this step, those two countries are eliminating 1.3 million barrels of crude per day from the global marketplace.

From marketing perspective

The news of the production cut into year end means crude oil prices will likely nudge higher for the short term. From a technical perspective, $100/barrel crude oil is a possibility by Christmas.

In addition to the global production cuts, the United States is faced with the reality of a shrinking reserve of domestic crude oil supplies, adding to the low supply notion.

To fight inflation and ease prices at the pump since crude oil initially rallied to $130/barrel after Russia invaded Ukraine, the Biden administration has used crude oil supplies from the United States Strategic Petroleum Reserve to provide additional supplies of crude oil to the U.S. consumer.

However, now supplies in the SPR are down nearly 300 million barrels since the war began, and the president took steps to ease crude oil prices by utilizing the U.S. strategic reserve. The United States domestic crude oil reserve supplies are the lowest since the mid-1980s.

Demand for crude oil remains strong for now. But with the price increase, I’m curious how demand will fare in the coming weeks.

When crude oil prices were stuck in that lackluster trading range for the past nine months, at least Americans could make it more of a “constant” or “expected” expense in their monthly budgets. Now with the crude oil price rally, prices at the pump will go up and hit Americans in their wallet. This piles on top of grocery store bills that never seem to come down and American credit card debt that continues to climb.

Prepare yourself

With global crude oil supplies now expected to be lower until the end of 2023, expect crude oil prices, gasoline prices, and even diesel prices to remain elevated into year end. There is not a quick fix to this situation.

There is a whole lot of geo-political drama happening behind the scenes which has motivated Russia and Saudi Arabia to take the steps they took to cut production. I wonder if we are going to see some political games of “chicken” occur between various nations in the coming months.

Global perspective

President Biden has been frustrated with Saudi Arabia for partnering with Russia on crude oil production cuts. Soon, President Biden's senior Middle East adviser is expected to travel to Saudi Arabia to meet with both Saudi and Palestinian officials.

When looking at Russia, higher crude oil prices help Russian President Putin fund his war on Ukraine. China and India keep buying Russian crude oil to meet their large demand needs.

While diesel fuel is based on heating oil (versus crude oil), take note that those prices continue to increase as well. Diesel prices have climbed over 25% since late June amid worries of possible global shortages.

Adding to the global dynamics, the European Union has been said to be importing near-record amounts of U.S. diesel over the past year when they stopped importing Russian fuel. Now we are heading into winter, where Europe will likely still need to import heating oil for winter heat/fuel along with diesel needs for vehicles.

What this means for your farm

Crude oil prices will likely trade higher for the short term. The next technical target higher is the $95.00 area, which would intersect with the top of the downtrend line that has held since March of 2022.  

The next target higher after that points to $100.00 a barrel, which we haven’t seen since July of 2022.

This higher priced energy is not welcomed, especially while the Fed continues to fight inflation. If the Fed continues to raise interest rates, it will impact your borrowing needs and farm planning not just for the remainder of 2023, but into the crop you’ll raise for 2024.

It will also have a direct effect on your farm due to costly energy prices for personal vehicles, tractors, combines, and semis as you head into harvest.

Reach Naomi Blohm at 800-334-9779, on Twitter: @naomiblohm, and at [email protected].

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

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About the Author(s)

Naomi Blohm

senior market adviser, Total Farm Marketing by Stewart Peterson

Naomi specializes at helping farmers understand how to manage cash marketing needs and understand the importance of managing basis, delivery point considerations, cash flow needs and storage capacity. She earned her Bachelor of Arts in Political Science with a minor in Agriculture Business at the University of Wisconsin in Platteville. She has a Master of Science in Adult Education with an emphasis in Ag Economics from the UW-Platteville and a Master Certificate in Global Education, from the UW-Oshkosh.

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