Heating Oil Futures Plunge Alongside Crude

Posted on 03/12/2020 1:25 PM

heating oil futures chart

OPEC+ members failed to agree on extending the production cuts that were instituted in December 2016, setting off a production war that threatens to derail shale profits and flood the export market with crude oil and refined fuels. The result was immediate. Crude futures crashed, touching a level just below $30 for a short period of time. Russia was reportedly a major fly in the ointment as that nation's energy sector crowed it was weary of curtailing production. Remember, the original production cut agreement forged in December 2016 was only supposed to last six months. More than three years later, and the Russian energy sector has apparently had enough.

Since the OPEC+ meeting failed to yield agreements to continue cutting production, Saudi Aramco decided to increase daily output to 112 million barrels per day. The Saudi energy Ministry then urged Aramco to make it an even 13 million gallons per day. Russia also raised production targets, igniting the fuse of a full-on crude oil production war.

U.S. shale producers are becoming increasingly nervous that they will not be able to maintain production margins in a low price environment. But we have seen this before. In recent years, shale producers have been very nimble and showed their ability to temporarily shutter high margin operations, only to bring them back online rather easily when the price environment improved. That will likely be the case this time around as well. There has been the suggestion that some producers will be forced to sell out, but, harsh as it may seem, one of the jobs of the free market is to allocate production capacity to low cost producers, thereby maintaining a production base for the entire sector. In other words, if production operations are forced to sell, there will likely be another entity standing in the wings who believes they will be able to turn a profit.

The low price environment spurred by the OPEC+ production war will undoubtedly stall some U.S. crude production and even run some companies out of business. For our part, we expect U.S. fuels prices to erode quickly, including farm diesel. While seasonal price strength could limit the downside in the near-term, our spread analysis (see chart at bottom) is flashing HOLD, HOLD, HOLD. We are willing to wait and see where the next few weeks price farm diesel. I maintain my target range between a regional average of $2.25 to $2.35 per gallon. This week we are at the top end of that range and I would expect to see whiteboard prices explore the bottom end, perhaps even touching $2.20 per gallon regionally.farm diesel price chart

Farm Diesel --

  • Our regional average farm diesel price firmed another penny per gallon this week with seven of twelve states unchanged.
  • Ohio led gains firming 14 cents as Michigan and Indiana each added a penny per gallon.
  • Kansas diesel softened 3 cents as Nebraska fell 2 cents.
  • April heating oil futures gapped 16 cents lower on Monday and have only partially refilled the gap, opening Thursday March 12 at $1.24.
  • According to EIA, national distillate stocks tumbled 6.4 million barrels in the week ended March 6. Stocks are currently 8.3 million barrels below the same week last year.
  • EIA also reports national crude oil stocks rose 7.7 million barrels during the report week, now 2.7 million barrels above the same week last year.

Propane --

  • Our regional average propane price is off a penny this week at an average of $1.46.
  • Nine states were unchanged as Indiana fell 8 cents as Illinois and Nebraska each fell 2 cents per gallon.
  • According to EIA, national propane stocks fell 2.921 million barrels but remain 16.872 million barrels above the same week last year and outside the top end of the Five-year average supply range.

Fuel
2/24/20
3/2/20
Week-over Change
Current Week
Fuel
Farm Diesel
$2.32
$2.33
+1 cent
$2.34
Farm Diesel
LP
$1.44
$1.47
-1 cent
$1.46
LP

When the spread rises (purple line), downside potential for farm diesel builds.

farm diesel heating oil futures spread

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