Energy prices had a short term peak just weeks ago after the flare up with Iran. Once the marketplace found relief in news that we were not at an immediate threat of war, crude oil futures, rbob gasoline futures, AND heating oil futures posted a bearish key reversal on daily charts, which was a technical topping action. 

A quick price sell-off then occurred, with crude oil futures losing over $15 a barrel in the following weeks.

The outbreak of Corona virus exaggerated the sell off as short term demand for energy products in China dropped substantially due to quarantine mandates. Bloomberg reported that Chinese oil demand had dropped by around 3 million barrels a day, or by 20% of its normal consumption due to the outbreak.

1. An overview of supply and demand.

If you haven’t been made aware of the overall fundamentals of crude oil, all you need to know is that we are WELL supplied. According the to the U.S. Energy Information Administration’s January 14, 2020 report, “annual average U.S. crude oil production reached a new record of 12.2 million barrels per day in 2019, up 1.3 million b/d from 2018. EIA forecasts U.S. crude oil production to average 13.3 million b/d in 2020 and 13.7 million b/d in 2021.”

Thankfully our export market has been red hot to match the huge production numbers.  In 2016 the United States exported just over 500,000 barrels of crude oil per week, with most recent numbers surging well over 3 million barrels per week!

Thinking globally, the fear right now is the short term demand loss in China due to Coronavirus. Demand for crude oil has slowed as transportation has slowed.  However, China will likely be anxious to do their best to continue to stay on top of Coronavirus and cease its spread as much as possible. Their economy has slowed because of the outbreak, and they will be anxious to get global production humming in order to get their economy back on track for continued growth.

Long term, Chinese demand for crude oil will pick up and likely continue to grow.

2. Seasonals.

If you look at the seasonal price pattern for crude oil futures there is a strong tendency for a price drop in early February, followed by a slow rally higher that lasts into early summer.  This makes sense as often times demand for energy needs grows as weather improves, spring break vacations occur, and school lets out for summer. Therefore, if you are in need of booking energy needs for your farm, now might be a great time to buy on sale.

3. Technical charts show strong support for crude at the $50 price level.

Looking back at the past two years, crude oil futures have strong support lines coming in at the $50 level.  Earlier this week prices dipped below $50 but have since come back above with gusto. We feel $50 will likely hold as support for now.

4. Take advantage of the opportunity!

This setback in prices for crude oil, rbob gasoline, and heating oil, is a tremendous opportunity for those who might need to book any energy needs for their farm. The U.S. economy is strong, and demand for energy is strong in the United States. Think of your cost of production for your commodities on your farm. If you can book your energy needs now, with this recent price drop, you might be drastically helping your bottom line.

 Reach Naomi Blohm: 800-334-9779 and [email protected]

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