Analysis, Advice and Position Update - 9/14/2012 - Fuels

September 14, 2012 10:14 AM

Natural gas -

Analysis: After three strong up days to start the week, natural gas futures ended the week under pressure from profit-taking. Energy futures, in general, benefited early in the week from anticipating the Federal Reserve Board would initiate a third round of quantitative easing (QE3) following the end of its regular Federal Open Market Committee (FOMC) meeting. That's exactly what the Fed did on Thursday. Here's the perspective on the action from this week's Pro Farmer newsletter:

"The Federal Reserve's Federal Open Market Committee (FOMC) meeting ended with the start of its third round of quantitative easing (QE3). Chairman Ben Bernanke says the Federal Reserve will purchase an additional $40 billion of mortgage-backed securities each month. That is in addition to existing stimulus activities (QE, QE2, Operation Twist), to bring total stimulus to an estimated $85 billion per month. (At this rate, we wonder how long it will take before the Fed 'owns' all mortgage-backed securities!)

"The action was widely expected, but it still supported equities while pressuring the U.S. dollar. Pressure on the dollar supported precious metals, crude oil and grain prices. With 'risk-on' money flowing into commodities again, one more supply-side scare for corn and soybeans would likely start the march back up to all-time highs."

Another round of Fed-based economic stimulus means more printing of dollars. The higher the supply of dollars, the lower the value of our currency. That won't help support natural gas values (a domestically produced fuel), but it will support crude oil futures (and likely grain prices).

Technically, natural gas prices (which heavily impact LP prices) now have resistance at just over $3.05. Support in the market is at $2.60. This market is likely to be range bound for the near-term and is currently near the top of the range.

Advice: Most likely, you've got the tanks full for the drying season. If not, there may be some pressure on LP prices this week, but increased movement in the weeks ahead as grain dryers operate and as homeowners prepare for the winter heating season will likely prevent any major downside price movement. If you haven't filled the tank for drying season, do so now.

Position: Cover all anticipated needs for the drying season.

Diesel -

Analysis: Crude oil prices firmed as Hurricane Isaac forced the shutdown of oil rigs and that translated into higher fuel costs at the pump and on the farm. About 90% of drilling operations in the Gulf are back up and running, which should take some of the upside push out of the fuel market.

However, increased tensions in the Middle East are adding geo-political uncertainty to the market. As long as tensions continue to rise in the Middle East, it will be exceptionally difficult to push crude oil prices down, which means little downside potential for diesel prices.

Advice: You've likely got most of your diesel needs covered for harvest. If not, there is the potential for a slight downtick in prices in the next couple of weeks, but the downside potential is limited. However, we also don't see much upside risk on diesel prices, unless the Middle East situation escalates.

You should have at least half of your anticipated diesel needs in the tank. If you don't, cover those needs now and remain open on the second half of needs. Most likely, we'll be looking to cover remaining harvest needs within the next 10 days to two weeks (when you're likely getting into the second half of harvest).

Position: Half of harvest diesel needs covered and looking to cover remaining needs in the near-term.


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