Farm Fuels in Focus: Diesel Set to Decline

• December 2016 natural gas opened today at $2.76 -- down 5 cents from our last Fuels in Focus.
• Farm Diesel is down 2 cents on the week at an average of $1.90 per gallon.
• December 2016 WTI crude oil opened the day at $45.37 -- up 74 cents from our last report.
• December 2016 Heating oil futures opened the day at $1.43 -- down 2 cents from our last report.
• Propane is up 2 cents on the week at an average of $1.09 per gallon regionally.

Farm Diesel -- Illinois led farm diesel higher. In fact, Illinois was the only state to post a higher price, firming 45 cents per gallon on the week. Four states were unchanged as South Dakota plunged 20 cents, Ohio fell 11 cents, Kansas dropped 9, Nebraska fell 8 cents and Minnesota softened 7 cents.

Our expectation for post-harvest price softness appears to be coming to fruition with only one state posting a higher price this week. We expect farm diesel prices to fall to an average closer to $1.80 per gallon by Christmas or shortly thereafter. We will wait until the market confirms a low before pulling the trigger, but plan on topping off and booking at least a portion for spring at that time. Our spread analysis (see far below) indicates near-term price softness is likely due to declining heating oil futures prices.

OPEC producers have a meeting planned for later this month. Of course, production targets will be a topic of conversation, and traders have already begun to place bullish bets. IEA reported OPEC produced a record 33.8 million barrels per day in October. Crude oil production can be accomplished no more by accident than can corn production. The record production pace may be a precursor to OPEC spokesman announcing production cuts. But it must be asked if production cuts from a fresh record high level is really a cut at all?

If I put on my tinfoil hat and adopt a mindset of healthy skepticism when reading headlines related to OPEC production targets, it could be argued October production surged in a calculated fashion so that at the November meeting, producers could use the words “production cuts”, while maintaining the status quo. OPEC production tends to run between 30 and 32 million barrels per day. A return from October’s record 33.8 million barrels per day to the prior 32 million barrels per day would support higher crude oil prices as traders would view this as a production cut.

But if the price-negative global oversupply is to be remedied, OPEC producers must take bigger steps and do more than just service headlines. Our expectation is for OPEC to announce production cuts after the November meeting, supporting higher crude oil prices. A close above $52.00 in December WTI futures could open the door for crude oil futures to adjust their trading range higher.

Donald Trump’s election could throw a monkeywrench in the OPEC strategy if Trump eases the regulatory environment here in the U.S. for energy producers. That would reduce the financial burden to a degree for producers and oilfield services, allowing greater profit potential. That would encourage WTI production, pressure global prices, and force OPEC to either come to terms with U.S. producers, or continue producing at high levels to maintain marketshare.

• Distillate inventories reported by EIA firmed 0.3 million barrels to 148.9 mmbbl. Stocks are currently 8.6 mmbbl above the same time last year.
• The regionwide low currently lies at $1.79 in South Dakota and the Midwest high is at $2.01 in Indiana.

Propane -- Illinois, Minnesota and Nebraska all firmed a nickel on the week as North Dakota added a penny. All other states were unchanged.

No rush here to top off winter supplies. The only reason you should be buying propane right now is if you are already running low for some reason, or if your crop is coming in wetter than expected. Beyond that, as with farm diesel, let’s wait out this mild price strength and top off at a better pricing opportunity.

The United States Energy Information Administration reported this week that propane and heating oil prices are comparable with last year’s and should be expected to remain low. Other organizations have predicted higher expenditures nationwide on home heat this winter based on forecasts for a cold, snowy winter. In other words, prices are expected to remain fairly flat while actual consumption will be to blame if customers spend more on heating oil, natgas and propane for home heat.

In wake of the surge in winter propane prices just a few years ago, many farmers increased propane storage and booked a full winter’s worth of propane. Some reported they had propane left over from a warmer than expected winter. This year may call those surplus supplies into service. Our strategy to book all the propane you will need to cover the entire winter left us with some extra. If you have filled an entire winter’s needs on top of the surplus that may have been left on hand, no further fill ups may be needed through periods of intense demand, lending security and independence to your home heating strategy.

• According to EIA, last week, national propane inventories firmed 1.227 million barrels -- now 3.642 million barrels below the same time last year at 100.827 million barrels.
• The regionwide low is at $0.95 per gallon in The Dakotas and the regionwide high is in Michigan $1.25.

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