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Energy/Ethanol Outlook: Fuel prices surge higher

Huge drop in crude supplies amps up rally

Price targets and seasonal trends aren’t only for grain marketing. They can also be useful when it comes to buying volatile energy inputs for the farm.

In my last outlook I recommended being ready to lock in fall diesel needs if Midwest cash wholesale benchmarks dropped to the $1.65-1.69 level. President Trump’s threat to slap tariffs on Mexico had doom and gloom pervading markets.

Seasonal trends also suggested a buying point was near. Fuel prices normally weaken once farmers have bought what they need for spring.

Chicago diesel prices plunged to the targets but didn’t stay there. Instead they jumped back 25 cents a gallon as crude oil prices surged.

Farmers may think the grain market is volatile. But crude oil fluctuations can be even more intense. A couple of months ago traders were talking about $100 crude oil if supplies from Iran were cut off, with flow from OPEC and its allies already reduced and Venezuela in turmoil. None of those trends has changed. But some feared tariffs could push an already weak global economy off the cliff. Just last week forecasts for crude below $40 surfaced – just in time for the market to jump up nearly $10 a barrel.

Tensions with Iran ratcheted higher of course. OPEC et al meet soon with an extension of production cuts looking likely. And lower prices convinced U.S. drillers to take rigs out of production steadily this spring and summer, ratcheting production lower. Then, U.S. exports surged to a record last week just as imports fell too. The result was a 12.8 million-barrel drop in inventories, sending prices on another surge.

Crude could always go to $100. But a more realistic upside target over the next month is $64.50. The recent break below $51 hit my short-term downside target.

Midwest diesel supplies dropped 840,000 barrels last week as fieldwork dragged on, the third straight week of declines. Refineries in the region are finally pumping out more fuel after a slow turnaround this spring, but the effort to rebuild supplies could be slowed by destruction of the big refinery in Philadelphia, the largest on the East Coast.

In the meantime, growers needing to book diesel must either be patient and hope for another pullback, or bite the bullet and refill tanks now. Prices are still around 10 to 15 cents below average according to my models.

The quick jump in costs should be a wake-up call for those still needing to buy propane. To be sure, this is a difficult task with corn yields so uncertain. But late planting favors a wet crop. The good news:  Gulf prices have followed crude higher, but supplies out of the Conway, Kansas hub have not and remain near three-year lows.

Inventories are up 30% year-on-year, hitting their highest level of 2019 last week. They should keep building until the heating season begins in the fall. But prices normally rise seasonally into the fall as well.

Ethanol prices were the odd man out of today’s rally, dropping despite a decline in inventories and production last week. The big rally in gasoline has brought ethanol back to a point where it’s economical to blend beyond the 10% wall. But falling gasoline demand last week raised concerns how much ethanol will be needed. As a result, USDA’s forecast for corn usage to make the biofuel still look too high. USDA reports usage data for May next week.

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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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