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AG ENERGY SNAPSHOT…
Some quick notes below from our latest Ag Energy Segment on WILL Ag Radio with Todd Gleason yesterday (full audio: https://soundcloud.com/narrowrow/apr-17-closing-market-report).
Fuel prices remain elevated as we have continued to struggle with building stocks in Crude, Distillates and LPG’s. Issue for both markets (oil & liquids) is exports…specifically the inability to build stocks to what would be considered historically normal/adequate due to the flow of product out of the country.
- Diesel prices in general up about a dime from when we did last month’s segment…and now more than 25-cents above what’s been the calendar year low so far in (1.80 future in mid-Feb)
- We’re also only about a dime below where last winter’s rally finally peaked out (2.15 futures)
- That’s putting dyed diesel prices delivered on-farm in Cent IL/IN near the 2.45 range for spot (shave a dime or so off if you go with the biodiesel blend) (shave another 10-15 cents off if you can handle full transport loads)
- Fall prices for contracting will hold about a dime premium to those spot numbers or 2.55-ish
- Last year the market made bottoms in May, and again in Jun, before starting a pretty vicious rally that lasted all the way to Jan of this year
- Price action from above of course relates back to stocks/inventories, which are currently 15% below where they stood a year ago at this time (-22 mln bbls), as well as 5 mln bbls below the most recent 5-year avg. (4%).
- While the situation is not dire, trying to project a scenario where diesel fuel stocks build and/or ‘catch up’ is difficult
- Record US oil crude oil production and refinery output of transportation fuels has not resulted in growing or ‘flush’ domestic inventories
- Instead a steady growth in domestic demand has combined with stronger growth in the export sector to keep stocks tight and prices firm
- Distillate exports from the US now top 1-mbpd, and account for 25% of overall demand (~4.0-mbpd)
- As US crude remains the cheapest feedstocks globally (currently $5/bbl discount to Brent), and OPEC seems content to stick to their cuts/quota (at least through 2018 & now talk of 2019) no reason to think that export demand will be shrinking/not growing in coming months
- This means we’ll likely be faced with historically deficit stocks levels for a while yet
Aggregating Factors – Supply Outages:
- In the Midwest, it’s looking more like spring agricultural demand will be packed into a smaller window once we do get going, and we are already seeing terminal outages after glitches and maintenance impacts supplies (particularly in NW regions of the belt)
Outlook/Advice – Diesel Fuel:
- Diesel inventories are generally going to struggle to get to levels that will open significant downside for prices
- If you’ve got your spring farm needs covered, you should be in good shape vs. current pricing…if you don’t, get your tanks full ASAP, as supply disruption could see some price spikes regionally in the Midwest as the season opens up
- For summer irrigation or fall harvest/fieldwork needs, would be a bit more patient. Please don’t take that as being outright bearish the market by any means, but rather want to buy/contract/fill into price weakness. Funds are currently heavily long, and very likely we’ll see a correction at some point regardless of (or not related to) the S&D fundamentals. That said, be ready to act when you get the chance. The target zone for doing so versus nearby futures should be in the $1.90-1.96, corresponding to the 23% & 38% retracement levels from the Jun’17-Apr’18 rally.
- US was already world’s biggest LPG exporter back in 2013 before the shale revolution started…but back then total was only around 150-kbpd
- In 2016 that number reached ~800-kbpd…last year in 2017 moved to ~900-kbpd (+13%)…and expected to reach the 1.0-mbpd average mark this year. That’s more than 50% of daily US production!
- Those exports are helped along by a pricing structure that has favored relatively high crude values and historically low natural gas prices (i.e. propane comes from oil as well as natural gas extraction)…so the higher the crude price…particularly the Brent crude price…the better the demand for US exports which primarily go into Asia, Europe and Latin America
- With US Export Capacity for LP at around 1.3-mbpd for 2018…it’s expected we’ll reach the 1.0-mbpd mark this year
- For perspective, US crude exports only averaging about 1.4-mbpd so far in 2018, so in a comparatively smaller market segment of propane, they are a significant source of demand
- Prices are up about a nickel from when we covered this topic in Mar, and about a dime off what has been the seasonal low to date (chart)
- That said, we are also almost 30-cents, or nearly 30%, off (below) the highest pried periods of last winter (97c Conway), and about 20-cents cheaper than where we entered last fall’s drying season.
- Filling tanks today on the spot/nearby market in Central IL/IN probably in the $1.40-1.45/gal range…for producers who can take transport loads, probably closer to $1
- Market currently showing a carry structure, meaning fall prices currently show a premium to spot, with fall delivery currently priced 5-10 cents higher than spot
- Last year the wholesale Propane market bottomed in late Mar just under 55c, and matched that again in Jun before starting a strong rally that lasted into January
- We’ve worked our way into a poor starting positon…stocks behind year ago and historical avg. levels
- US propane stocks ended the winter season last year at around 41 mln bbls, bottoming in late March…the previous year 63 mln at the end of Feb
- This year, we’ve still seen declines into April due to cold temps, with them currently standing under ~36-mln bbls
Outlook/Advice – Propane:
- Export growth is the story of the market…as currently accounting for over 50% of US propane production/demand, (with that supply coming from advances in US shale output (crude & nat gas))
- Current pricing structure (US crude/NGL’s discount to Brent, Dubai and Asian values), gives us no reason to think that trend stops anytime soon
- An extended winter here in the US has likewise kept US heating demand strong, and been a further pull on inventories
- Starting from a poor spot, will be hard to improve the stocks situation across the summer months (i.e. catch up in the face of record export demand)
- This likely to keep U.S. propane inventory balances below multi-year averages or ‘normal’ levels for the foreseeable future (18/19)
- Prices currently closer to what we would feel are the bottom of range versus what we feel can be the top (last year should be a good reference)
- Advise using any near term price weakness to go ahead and fill your tanks…if you don’t have storage for all of your needs, get at least 50% of fall needs booked/contracted.
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