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Diesel fuel gauge bizoo_n/ThinkstockPhotos

Energy/Ethanol Outlook: Fuel looks cheap

Consider locking in diesel costs for spring and fall.

Growers who watch grain market basis know that strong basis is the time to lock in the cash portion of their price. Flip that perspective 180-degrees when buying inputs, which means it’s time to lock in diesel costs for spring, and if possible, fall.

Those with dealers basing offer sheets off the Chicago market are seeing the weakest basis in nearly seven years – around 29 cents under futures -- thanks to bulging Midwest supplies. Basis off the Group 3 pipeline used by other dealers isn’t nearly as weak, but is still trading a seasonally low levels that signal buying opportunities. Chicago cash prices traded down to $1.43 a gallon just after New Year’s Day – they’re about a dime higher today. The Group 3 benchmark dropped to $1.575 – it’s up 14 cents off those lows.

I previously recommended getting started on buying half of spring diesel needs when crude oil broke below $50 a barrel at the start of winter. Crude futures finally bottomed on Christmas Eve just above $42, trading back above $49 today. Production cuts by OPEC and its allies, including Russia, are starting to kick in with the new year. While U.S. production stayed near record levels to end 2018, drillers are taking rigs out of production. While oil may not have a lot of upside, due to a world economy starting to show signs of slower growth, crude still looks undervalued compared to my average price forecast for the year of around $55.20 a barrel.

Cheap crude help swelled margins for refiners, convincing them to churn out fuel despite seasonally slow demand from farmers, whose buying in the spring and fall drives basis. In diesel, that’s figured by comparing cash prices to Ultra Low Sulfur Diesel futures delivered in New York Harbor. The New York price tends to be higher during the winter because ULSD is still used as a heating fuel in some parts of the Northeast.

The best time to buy fuel tends to be in the winter and summer, when farmers aren’t using so much. While there’s potential for prices on fall fuel to be cheaper, the reverse could be true if the supply chain breaks down due to economics or politics around the world. The list of places where crude comes from reads like a travel advisory for trouble spots – Libya, Iran, Venezuela and Nigeria, just for starters.

I also recommended getting started with securing 2019 propone for those whose dealers could lock in low summer fill prices using the swaps market. It’s still early seasonally for pricing drying fuel – propane typically makes a bottom in late winter or early spring, with weakness sometimes noted in summer, too. The warm El Nino winter could also push down prices more. But the benchmark price from the Conway, Kansas hub ended last week at 54 cents, its lowest since June 2017, and summer swaps were a couple cents cheaper. Locking in at least half of fall needs seems prudent, and being 100% priced isn’t unreasonable, even this early.

The rebound in crude oil could also give ethanol a much-needed lift. Margins improved at the end of last week thanks to higher ethanol values. The industry remains under pressure, however, and current levels of production suggest USDA may be 50 million bushels or more too high on its current forecast of corn usage to make the biofuel.

Download a complete version of the outlook with extensive charts and analysis using the Download button at the end of this report. 

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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