Farm Fuels in Focus: Signs Point to Sideways Diesel

October 6, 2015 01:09 PM

 

  • LP is up a penny on the week to $0.99 per gallon.
  • November 2015 natural gas opened today at $2.45 -- 21 cents below our last Fuels in Focus.
  • Farm Diesel is 2 cents lower on the week at an average of $2.00 per gallon.
  • November 2015 WTI crude oil opened the day at $46.20 -- $1.70 above our last report.
  • November 2015 Heating oil futures opened the day at $1.54 -- 7 cents higher than our last report.

1062015RubyRedFarm Diesel -- Diesel prices continue to drift lower even as WTI crude oil firms. That is due to soft global demand for all fuels, and building U.S. distillate stocks. Today, EIA released its October Short-term Energy Outlook (click here for more) which lowered the top end of WTI crude oil price guidance by 6 bucks to $67.00 per barrel. WTI crude production in 2015 was projected at 9.2 million barrels per day and the 2016 projection was raised by a tenth of a point to 8.9 million barrels per day. That should keep distillate supplies strong. Adding support to the supply outlook is projected soft demand for fuels including heating oil and diesel. That will lever for lower farm diesel pricing for harvest 2015 and possibly for plant 2016.

We stand by our decision to book 30% of our diesel for spring. Crude oil has been unpredictable at best over the past year. Saudi Arabia, which in the past has held the reigns of the global crude price as the world's most influential swing producer, must by now be running low on cash since the bulk of Saudi's national revenue comes from oil sales. Saudi has lowered prices for its preferred Asian buyers in an effort to garner marketshare and thin margins for U.S. producers, but at some point, Saudi will have to raise prices to maintain their GDP. OPEC production is reported stable at the very top end of production capacity. That figure will likely be our first clue when Saudi reverses its volume over price strategy and attempts to support higher global crude oil pricing.

For now, we are content to book diesel hand-to-mouth for the remainder of harvest. Our diesel/heating oil spread (see chart below) is giving no indication that prices will firm in the near-term. With diesel at 2.00 per gallon, our appetite for risk based on our spread analysis will run dry with heating oil futures at $1.70. This week heating oil futures are at $1.54, up 7 cents on the week, but still within our range of sideways diesel price action. Distillate stocks softened slightly on the week, but current stocks are well above the prior year. That will help limit farm diesel prices as well.

  • Distillate inventories reported by EIA fell 0.3 million barrels to 151.6 mmbbl. Stocks are currently 25.9 mmbbl above the same time last year.
  • The regionwide low currently lies at $1.81 in Missouri and the Midwest high is at $2.18 in Wisconsin.
Farm Diesel 10/6/15
Three Weeks Ago
Previous Week
Change
Current Week
 
Iowa
$2.01
$2.02
-4 cents
$1.98
Iowa
Illinois
$2.07
$2.07
5 cents
$2.12
Illinois
Indiana
$1.99
$2.08
Unchanged
$2.08
Indiana
Wisconsin
$2.18
$2.18
Unchanged
$2.18
Wisconsin
Minnesota
$2.12
$2.01
1 cent
$2.02
Minnesota
South Dakota
$1.95
$1.95
Unchanged
$1.95
South Dakota
North Dakota
$1.97
$1.95
Unchanged
$1.95
North Dakota
Nebraska
$1.95
$1.95
-5 cents
$1.90
Nebraska
Missouri
$2.02
$1.81
Unchanged
$1.81
Missouri
Kansas
$2.14
$2.18
-25 cents
$1.93
Kansas
Ohio
$1.98
$1.98
Unchanged
$1.98
Ohio
Michigan
$2.05
$2.05
2 cents
$2.07
Michigan
Midwest Average
$2.04
$2.02
-2 cents
$2.00
Midwest Average

1062015LPPrice

Propane -- The more corn that comes in across the Midwest the wetter it seems to get. Early harvested acres were extremely dry and will require very little propane before storage. As time goes on, reports are creeping into the mid-20's on moisture content. Most growers booked propane at a price below $1.00 per gallon in preparation for harvest and winter home heat. EIA projected propane prices 18% below the same time last year. According to Inputs Monitor data, as of this week, prices are twice that figure below the same time last year at 37% below last year's $1.57 per gallon.

Our analysis suggests propane is currently undervalued and we do not expect prices to reach the low levels they are at now, in the coming summer. If propane consumption falls due to drier than expected grain and a mild winter, the propane you have left over in the tank will still be useable in the next year and topping off in the offseason at higher prices will only cost you as much as you need to refill on top of carryover LP from today.

If EIA is correct that winter LP prices will be below last year by 18% and we are currently at 37% below last year, the implication is that propane has 29 cents of upside risk attached to the current price -- that would support LP pricing at $1.28 per gallon. Winter temps, of course, will drive propane demand for the next several months. So far, LP doesn't appear to be in any kind of hurry to firm.

  • According to EIA, last week, national propane inventories firmed 1.665 million barrels -- now 19.181 million barrels above the same time last year at 98.741 million barrels.
  • The regionwide low is at $0.79 per gallon in Ohio and South Dakota and the regionwide high is in Illinois at $1.25.
LP 10/6/15
Three Weeks Ago
Previous Week
Change
Current Week
 
Iowa
$0.95
$0.97
1 cent
$0.98
Iowa
Illinois
$1.25
$1.25
Unchanged
$1.25
Illinois
Indiana
$1.67
$1.03
Unchanged
$1.03
Indiana
Wisconsin
$1.10
$1.10
Unchanged
$1.10
Wisconsin
Minnesota
$0.96
$0.96
2 cents
$0.98
Minnesota
South Dakota
$0.79
$0.79
Unchanged
$0.79
South Dakota
North Dakota
$0.80
$0.83
Unchanged
$0.83
North Dakota
Nebraska
$0.80
$0.80
9 cents
$0.89
Nebraska
Missouri
$1.04
$1.04
Unchanged
$1.04
Missouri
Kansas
$0.90
$0.94
-1 cent
$0.93
Kansas
Ohio
$0.79
$0.79
Unchanged
$0.79
Ohio
Michigan
$1.29
$1.29
-7 cents
$1.22
Michigan
Midwest Average
$1.02
$0.98
1 cent
$0.99
Midwest Average

1062015DieselSpread