Crude oil prices are expected to drop right into 2014 because of strong production, according to the U.S. Energy Information Administration’s Short-Term Energy Outlook released Jan. 8. The outlook is the first to include forecasts for 2014. Falling crude oil prices will also pressure gasoline prices lower, but natural gas prices are expected to rise substantially.
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, their margins will be crimped," Jodock says. "They might not run at full capacity, which means there could be less demand for corn in 2014."
Looking at the numbers, the Energy Information Administration (EIA) forecasts that Europe’s Brent crude oil price will fall to an average of $105/barrel in 2013, before dropping to $99/barrel in 2014. Last year, the Brent crude oil price averaged $112/barrel.
At the same time, though, the projected discount for West Texas Intermediate (WTI) crude oil compared to Brent will narrow. In 2012, the gap between the two prices averaged $18 per barrel. This year, EIA expects the difference to narrow to $16/barrel before dropping to $8/barrel in 2014.
Moving U.S. oil out
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 begin to reduce U.S. inventories, raising U.S. prices and narrowing the gap with Brent crude oil prices, EIA says.
Falling crude prices will also pressure retail gasoline prices from an average of $3.63 per gallon in 2012 to an average of $3.44 per gallon this year and $3.34 per gallon in 2014. Retail diesel fuel prices are also expected 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, which was an increase of 0.8 million barrels per day from the previous year. 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, too, is demand. EIA estimates that demand for all U.S. liquid fuels will rise gradually over the next two years to an average of 18.8 million barrels per day in 2014 after having fallen from an average of 20.8 million in 2005 to 18.6 million last year.
The natural gas pinch
At the same time, natural gas prices are rising despite record-high working 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 last year.
"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 wildcard. With or without this report, corn producers need to look to 2013 and 2014 to determine whether they can lock in a profit, Jodock says.