February heating oil futures broke through psychological support at $1.00 in this morning's trade. The graphic at right from EIA shows why. National distillate stocks have very nearly climbed above the top end of the five year average supply, driving February futures to as low as 98 cents at midmorning. Technically, next support is difficult to figure. We haven't seen heating oil futures this low since before the price spike of 2009 when futures rallied to $3.53 on the monthly chart.
Crude oil prices have helped pressure heating oil futures to fresh longtime lows and appears to be eyeing a move below $30 per barrel. The February WTI contract has been in decline since the start of the new year, falling 21.3% since 2016 trade opened on January 4. Massive national stocks are the reason for the pressure here as well, but OPEC members appear to be getting nervous and have suggested they may want to convene a meeting before their scheduled June strategy meeting with the aim of stopping the crude oil price slide. But even if members of the OPEC cartel opt to slow production to support prices, it will take several months for refiners and other end users to work through the current glut of crude oil.
We have talked about how the current low price environment has discouraged new projects and exploration and how that might contribute to an oil price spike once global supplies are more balanced. If OPEC gives clues they will cut production, prices will likely firm mildly -- depending on how much OPEC members cut production -- and that may add incentive to restarting exploration and new investment. If U.S. producers and oilfield service providers can ride the wave of higher oil prices and strong national stocks, it may create a situation where price spikes continue to be mitigated, confining oil prices below $60 per barrel long-term.
For now, the spread between our current diesel bid and heating oil futures (see chart below) suggests lower diesel prices ahead. We expect farm diesel to bottom around $1.50-$1.60 regionally although growers have called the Inputs Monitor reporting bids from their preferred retailers in the $1.40 area. Get in touch with your preferred supplier today and find out your current local farm diesel bid. If you can find a quote for sub-$1.50 diesel, book it all day long. If not, give it some time, but keep an eye on crude oil and especially front-month heating oil futures (HOG16). A move back above $1.10 will indicate higher futures pricing ahead and levers for higher farm diesel.
If crude oil and heating oil futures want to keep falling for us, we are not going to try and catch a falling knife. In that case, let diesel run lower as long as you can and book hand-to-mouth until crude and heating oil futures rally significantly.