Diesel Screams Lower

Posted on 04/15/2020 12:52 PM

 

OPEC+ has agreed on crude oil production cuts among its members. The news sent crude futures higher on Friday even though details were, at the time, scant at best. The details of the proposed cuts, which are to take effect on May 1 failed to sustain the move higher in futures and by mid-week, front-crude futures had fallen back below $20 per barrel.

The agreement yielded a 10 million barrel per day cut among oil producing nations including Saudi Arabia and Russia. Watchers had anticipated a 10 million barrel cut, and there were whispers at the time of the meeting of a possible 20 million barrel per day cut.

As speculation and elation spurred buying in futures on Friday, confirmation of the "as expected" level of production cuts let the air out of the balloon. It is thought that even with the agreed upon cuts, the supply and demand balance is still of kilter.Daily May WTI crude futures chart

Meanwhile, U.S. oil firms are beginning to shutter operations as margins have thinned beyond their financial tolerance. U.S. storage is at or near capacity, and railroads have pushed back against oil producers storing Texas tea in idle rail cars.

While supply-side management may have helped Saudi Arabia as a swing producer in a higher price environment, as with ethanol, soybeans, pork... the list goes on, sagging returns on crude oil will only be remedied by invigorated demand. As with so many industries disrupted by COVID-19, stalled liquid fuel demand around the world will keep a lid on crude oil and fuels prices until cars are back on the road, and flights fill up. Until then, the supply-side approach may offer some short-term relief, but the realities of the supply/demand balance will keep crude oil price action muted.

Farm diesel screamed lower this week. Wwe have been content to wait and see where the market ends up. I evidently gave spring fieldwork demand too much credit for being able to prop up prices. I still feel there is that risk, but with this week's 28 cent dive in retail ruby red, we will continue to wait before booking spring/summer supplies aggressively.

I have said before, I do not want you to sit and wait for the market to sort itself out with empty fuel tanks. You should be at least 50% filled on spring/summer needs. But when the market indicates it is poised to recover, we will have a golden opportunity to book favorably priced farm diesel. On that day, we will likely recommend you fill every barrel, bucket and tin can on your farm. We may not see prices like these again in our lifetimes.

farm diesel price chart

Farm Diesel --

  • Our regional average farm diesel price plummeted 28 cents on the week to a regional average of $1.92 per gallon.
  • South Dakota led declines falling 63 cents per gallon. Ohio softened 55 cents and Nebraska fell 35 cents. No state posted a higher farm diesel price this week and Illinois, Michigan and Wisconsin were all unchanged.
  • As of Wednesday morning, front-month heating oil futures were trading below $1.00 and prompt WTI was below $20 per barrel.
  • According to EIA, in the week ended April3, national distillate stocks gained 500,000 barrels, now 5.3 million barrels behind the same time last year and still outside the bottom end of the five-year average supply range.
  • EIA also reported U.S. crude oil stocks jumped 15.2 million barrels during the report week. Now 27.8 million barrels above the same week last year.

Propane --

  • Our regional average propane price slipped 12 cents on the week.
  • Nebraska led declines falling 50 cents per gallon as Kansas shed 25 cents and Minnesota softened 22 cents per gallon. As with diesel, no state posted a higher LP price this week.
  • According to EIA, during the report week, national LP stocks fell 168,000 barrels to a level still 10.139 million barrels above the same time last year.

Fuel
3/28/20
4/6/20
Week-over Change
Current Week
Fuel
Farm Diesel
$2.18
$2.20
-28 cents
$1.92
Farm Diesel
LP
$1.46
$1.46
-12 cents
$1.34
LP

Farm diesel heating oil futures spread chart

 

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