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Energy/Ethanol Outlook: Record production cheapens U.S. crude

Energy market churns on global concerns

The energy market remains a ship navigating a sea of uncertainty. The only solid trend comes from agriculture, as farmers burn through more diesel to bring in 2019 crops.

Otherwise, crude oil’s attempt to put in a bottom continues haltingly, in part due to uncertainty about where the global economy is headed. Forecasts for crude oil consumption ratcheted lower this month, with forecasts for stocks moving higher. But overall crude oil usage will still be greater in the year ahead, though the increase may not be as big as previously expected.

So what does that mean for prices in 2020? That depend on who you believe. The futures market says prices for crude oil and diesel should be lower. But fundamentals of supply and demand suggest just the opposite.

Those prices are averages, of course. In reality, costs are likely to swing higher and lower in the volatile energy market. Crude oil’s 2019 low of $44.35 was made on the first trading day of the year. The high of $66.60 came in April, when the market settled into a $10 trading range interrupted only by a brief spike following attacks on Saudi oil fields in September.

Implied volatilities in crude oil options – typically the highest of any of the “VIX” derivatives – suggest crude could trade in a range from around $39 to $74.50 in the year ahead, with the average price near $56.75. But that measure, crude is only a little undervalued right now.

Some of the discount is due to record production in the U.S., despite a steady decline in the number of rigs in service as oil companies focus on their most productive fields to lower costs. Another factor is a sharp increase in the cost of shipping crude around the world triggered by U.S. sanctions on a big Chinese transporter that’s reduced the number of ship many companies can use. That means the cost of U.S. crude is higher than oil from the Middle East and Africa into big Asian markets.

Swings in diesel likely won’t be as big as crude but could still bring pain at the pump for those who don’t buy breaks. Midwest cash wholesale benchmarks could average around $2.10 a gallon in 202, trading in a range from $1.75 to $2.40. That means current prices, around $1.85 are closer to the bottom of their range than the top.

Midwest diesel inventories are still tightening on harvest demand and production cutbacks as refineries perform maintenance after the peak summer driving season. But prices likely won’t get much more expensive now without a surge in crude, with cash markets easing into the end of the year.

Propane prices jumped a little this week as the first blast of winter descends on the Plains and Midwest. Typically, propane rallies into October to encourage stockpiling ahead of winter, with swings later depending on crude oil prices and just how cold it gets. Some long-range models are calling for above normal temperatures over the western half of the U.S., which could limit disruptions.

Ethanol prices got a boost from the attack on Saudi fields, then extended gains as stocks plummeted on cutbacks by the industry in the face of poor margins. Inventories fell to the lowest level more than two years after production last month dipped to its lowest point since 2016. Output picked up again last week as margins jumped higher.

The Administration’s proposed deal on biofuels won’t lead to a new golden age of ethanol but should help stabilize demand assuming it withstands likely challenges from “Big Oil.” Still, until more E15 pumps are put into service it will be difficult to increase domestic demand. And if ethanol gets too expensive to blend – which it is currently – more pumps may not matter.

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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

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