Reduced pressure at the pump means less demand for corn
Crude oil prices are expected to drop into 2014 because of strong production, according to the U.S. Energy Information Administration’s (EIA) Short-Term Energy Outlook released Jan. 8. Falling crude oil prices will pressure gasoline prices lower, but natural gas prices are expected to rise.
"If ethanol plants are paying more for natural gas and selling into a market with lower gasoline prices, margins will be crimped."
If the numbers in this report come to fruition, it will have an impact on the corn market, says Karl Jodock, market analyst at Progressive Ag in Fargo, N.D.
"If ethanol plants are paying more for natural gas and selling into a market with lower gasoline prices, margins will be crimped," Jodock says. "They might not run at full capacity, meaning there could be less demand for corn in 2014."
Looking at the numbers, EIA forecasts that Europe’s Brent crude oil price will fall to an average of $105 per barrel in 2013, before dropping to $99 per barrel in 2014.
Soon 400,000 barrels of crude oil will move from Cushing, Okla., where it is stockpiled, to Gulf Coast refineries because of the opening of the Seaway pipeline. The new pipeline capacity is expected to lower the cost of moving oil and thus reduce U.S. inventories, raising U.S. prices and narrowing the gap with Brent crude oil prices, EIA says.
Falling crude prices will pressure retail gasoline prices from an average of $3.63 per gallon in 2012 to $3.44 per gallon this year and $3.34 per gallon in 2014. Retail diesel fuel prices are also forecast to drop, from 2012’s average of $3.97 per gallon to $3.87 per gallon in 2013 and $3.78 per gallon in 2014.
According to EIA estimates, U.S. crude oil production averaged 6.4 million barrels per day last year, an increase of 0.8 million barrels per day from 2011. This year, U.S. oil producers will extract 7.3 million barrels per day and increase production to 7.9 million barrels per day, marking the highest production level since 1988.
While production is rising, so is demand. EIA estimates that demand for all U.S. liquid fuels will rise gradually during the next two years to an average of 18.8 million barrels per day in 2014.
At the same time, natural gas prices are up despite record inventories in November. EIA forecasts the Henry Hub natural gas spot price to rise to $3.74 per million British thermal units this year, and then climb to $3.90 in 2014. Henry Hub prices averaged $4 in 2011 before crashing to $2.75 in 2012.
"If natural gas prices are going back to 2011 levels, that would have a positive effect on fertilizer prices, which would be negative for corn producers," Jodock says. "These numbers pinch corn production from both sides."
But whether the prices in EIA’s outlook actually play out is the biggest wild card.