Banking On Cheap Oil Prices Not Easy

Weekly Energy Review for November 5, 2014

While crude oil and ULSD futures are at multi-year lows, farmers looking for bargains on red diesel likely
will have to be creative with aggressive marketing.
Diesel futures made fresh four-year lows Wednesday, but prices in the Midwest wholesale cash market
rocketed higher on another plunge in supplies. Soaring basis took wholesale cash prices 50 cents above
futures, which are delivered in New York Harbor. Basis for the widely used Group 3 benchmark neared
levels hit when Midwest supplies were diverted to the East Coast in the wake of Superstorm Sandy in
2012. The Mid-Continent price at Conway, KS, reached 50 cents over, its highest level since at least
2006.
While some shuttered refineries were scheduled to be back on line, more maintenance issues took
production down another 13,000 barrels a day last week, the sixth straight weekly decline. Almost the
entire 1.7 million barrel decline in inventories came in the Midwest, where demand from farmers is still
strong. Pipeline outages also triggered buying, creating some spot shortages in the upper Midwest.
Gasoline supplies are also dropping on seasonal maintenance, and perhaps better demand as prices fall.
That got the attention of the market today after release of weekly supply and demand data, with crude oil
reversing higher after hitting three-year lows at $76.46. Crude has come under pressure from concerns
about slowing demand from a faltering world economy, just as U.S. output increases, prompting Saudi
Arabia to slash prices in a bid to maintain market share.
The tight Midwest diesel market makes buying fuel difficult. Basis should weaken into winter as ag
demand slumps, but futures prices could be higher depending on world events and winter weather. We
previously recommended a scale down approach that locked in two 25% increments of spring fuel needs
in the cash market, with another 25% done in futures, leaving basis open until cash is purchased. Some
dealers will offer this type of deal and large growers who are comfortable trading futures and use a lot of
fuel can also do this on the board the contracts cover 1,000 barrels, or 42,000 gallons. Mini-contracts
are available but have very thin volume. Swaps are another possibility if your broker handles them.
Futures have fallen into the bottom 15% of the expected price range given current fundamentals, which
put average fair value around $90. Renewed concerns about a supply glut and slow growth could take
crude prices toward $72, which might take diesel to $2.30 or less.
Propane prices are stronger, despite weaker demand last week. Swaps continue to show a good break in
prices into spring and early summer, the best time seasonally to buy inventory to dry next years crop.

Days of Crude Oil Supplies

Current Year

29

Prior Year

27

25

23

21

19

17

15

Source: EIA

Commitment of Traders - Crude Oil

2,500,000

160
140

2,000,000

Crude Oil

120
100

1,500,000

80
1,000,000

60
40

500,000

20
0
1999 2001 2003 2005 2007 2009 2011 2013
Crude Oil

Open Interest

U.S. Gasoline Stocks

250

Current

5-Year Min.

5-Year Max.

240
230

million barrels

220
210
200
190
180
170
160
150

Source: EIA

Days of Gasoline Supplies

Current Year

31

Prior Year

29
27
25
23
21
19
17
15

Source: EIA

Total Petroleum Product Exports

4000
3500

thousand barrels per day

3000
2500
2000
1500
1000

Source: EIA

Refinery Capacity Utilization

100

Current Year

Prior Year

95
90

per cent

85
80
75
70
65
60

Source: EIA

Group3DieselSeasonal
380
360

20082013

20122013

20132014

20142015

340
320
300
280
260
240
220
200
7/1

8/1

9/1

10/1

11/1

12/1

1/1

2/1

3/1

4/1

5/1

6/1

5/1

6/1

Group3DieselSeasonalBasis
$0.60

20082013

20122013

$0.50

20132014

20142015

$0.40
$0.30
$0.20
$0.10
$0.00
$0.10
$0.20
$0.30
$0.40
7/1

8/1

9/1

10/1

11/1

12/1

1/1

2/1

3/1

4/1

U.S. Diesel Stocks

140

Current

5-Year Min.

5-Year Max.

130
120

million barrels

110
100
90
80
70
60
50
40

Source: EIA

Days of Distillate Supplies

55

Current Year

Prior Year

50
45
40
35
30
25
20
15

Source: EIA

Crudeoil

EngeryFuturesPriceCurve

Diesel

$81

$2.57
$2.56

$80
$2.55
$79

$2.54
$2.53

$78
$2.52
$2.51

$77
Crudeoil
$76

Diesel

$2.50
$2.49
$2.48

14Dec
15Feb
15Apr
15Jun
15Aug
15Oct
15Dec
16Feb
16Apr
16Jun
16Aug
16Oct
16Dec
17Feb
17Apr
17Jun
17Aug
17Oct
17Dec
18Feb

$75

MidContinentDieselSeasonalBasis
60
50

20062013

20122013

20132014

20142015

40

cents/gal

30
20
10
0
10
20
30
7/5

8/5

9/5

10/5

11/5

12/5

1/5

2/5

3/5

4/5

5/5

6/5

33000

1600

31000

1500

29000

1400
1300

27000

1200

25000

1100

23000

1000

21000

900

19000

800

17000

700

15000

600

Stocks

Production

Source: EIA

thousand barrels/day

thousand barrels

Midwest Diesel

Season diesel prices

Midwest on-road price
$1.45

$4.20
$4.10

$1.35

$3.90
$3.80

$1.30

$3.70

$1.25

$3.60
$3.50

$1.20

$3.40

$1.15

$3.30
Jan FebMar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: NYMEX, USEIA
2014

2013

10-year average

U.S. Propane Stocks

90

Current

5-Year Min.

5-Year Max.

80

million barrels

70
60
50
40
30
20
10
0

Source: EIA

10-year average

$1.40

$4.00

Days of Propane Supplies

Current Year

95

Prior Year

85
75
65
55
45
35
25
15

Source: EIA

Total Propane Supplied (Demand)

2000
1800
1600

thousand barrels per day

1400
1200
1000
800
600
400
200
0

Source: EIA

Spot propane prices

vs Crude oil
Mid-Continent Propane

Crude Oil

$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0

Seasonal propane prices, 1993-2008

(Conway, Kansas)
Average
2012-2013

Average (left axis)

2013

2012

2014

2014

150

500

140

450

130

400

120

350

110

300

100

250

90

200

80

150

70

100

60

50

50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Seasonal propane prices, 1993-2008

(Mont Belvieu, Texas)
Average
2012, 2013
Average (left axis)

2013

2012

2014

2014

145

180

135

160

125

140

115

120

105

100

95

80

85

60

75

40

65

20
-

55
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

CMESwapsCurve
MontBelvieu,TXwholesaleprice
$0.91
$0.90
$0.89

$0.87
$0.86
$0.85
$0.84
$0.83

Source:CMEGroup

16Dec

16Nov

16Sep

JLY16

16May

16Mar

16Jan

15Nov

15Sep

JLY15

15May

15Mar

15Jan

$0.82

14Nov

pergallon

$0.88

CMESwapsCurve
ConwayKansaswholesaleprice
$0.98
$0.96
$0.94

pergallon

$0.92
$0.90
$0.88
$0.86
$0.84
$0.82
$0.80

Source:CMEGroup