Harvest fuel costs stay expensive

Rising crude oil prices take diesel and propane higher

By Bryce Knorr, senior grain market analyst

Growers needing fuel to harvest and dry big crops this year face higher costs, and fuel bills likely won’t
get any cheaper in 2019.

In fact, the only cheap fuel these days is the one farmers produce: ethanol. Prices for the biofuel remain
near the lowest level since the corn-into-energy boom began more than a decade ago. While that’s
pressured margins at ethanol plants, forcing some to close recently, production picked up last week and
stocks declined. That suggests corn usage so far in the new 2018 marketing year is on track to meet or
beat USDA’s forecast for a modest increase.

Weak ethanol prices are at least encouraging blending, because gasoline is priced at a 60% premium as
the summer driving season ends. While the slowdown to gasoline demand sometimes affects crude oil
usage, that wasn’t the case last week. Crude oil stocks declined due to lower imports and increased
exports, sending futures above $71 a barrel, with charts setting up a challenge of the summer highs
above $75.

U.S. crude is in demand right now as countries shun exports from Iran ahead of the restart to sanctions in
November. That lifted the Brent international benchmark to nearly a $10 premium over West Texas
Intermediate, making U.S. supplies look like a bargain.

U.S. crude stocks normally drop into the end of summer, but his year they’re at the lowest level since
2015. The number of days’ supply is the lowest since 2014.

Diesel supplies are headed in the other direction, reaching the highest level since Hurricane Harvey
disrupted the market last September. But prices followed crude oil, staying near their highest levels since
the typically strong spring planting season.

Midwest refineries continue to run near capacity, and stocks in the region are actually building as
combines begin rolling. That has weekly supplies of ultra-low sulfur diesel at an all-time high.

Yet ULSD prices likely won’t get much cheaper until the crop is tucked away, barring a broader market
trigger like a sharp downturn in the stock market. In the meantime, propane costs are still rising
seasonally ahead of the heating season. Propane typically follows crude oil for direction, too.

Growers got a few chances to buy propane this spring at cheaper levels around 20% less than current
costs. Diesel never offered many bargains this summer, typically a good time to book harvest needs. In
July I recommended using a dip in the energy market to complete propane purchases and step up diesel
coverage to two-thirds of harvest needs.

While the energy market is known for market disruptions, average prices likely won’t get any cheaper in
2019. Average farmgate diesel could run around $2.50 a gallon, with costs maybe a quarter a gallon
cheaper if crude oil prices swoon. Patience, and a little bit of luck, will be needed to get a shot at locking
in planting needs.
 Commitment of Traders - Crude Oil
160 3,000,000
140
2,500,000
120
2,000,000
100
Crude Oil

80 1,500,000
60
1,000,000
40
500,000
20
0 -
2007 2009 2011 2013 2015 2017

Crude Oil Open Interest

Crude Oil Futures and Options
net position 
long/short
Managed Money Crude Oil Futures
600000 $120

500000 $100

400000 $80

300000 $60

200000 $40

100000 $20

0 $0
1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018

Source: CFTC, NYME/CME
 U.S. CRUDE OIL PRODUCTION AND RIG COUNTS
12000 1800
Production Rig Counts 1600
10000
1400
8000 1200
thousand barrels/day

oil and gas rigs

1000
6000
800
4000 600
400
2000
200
0 0
2014 2015 2016 2017 2018
Source: U.S. EIA, Baker-Hughes

U.S. CRUDE OIL STOCKS

550 Current 5-Year Min. 5-Year Max.

500

450
million barrels

400

350

300

250

Source: EIA
 Stocks WEEKLY ETHANOL PRODUCTION AND STOCKS Production

25000 1150

24000 1100

23000
1050
thousand barrels

22000

thousand barrels/day
1000
21000
950
20000
900
19000
18000 850

17000 800
9/1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 9/1/17 11/1/17 1/1/18 3/1/18 5/1/18 7/1/18 9/1/18

Ending stocks Daily Production

ETHANOL PRODUCTION
GALLONS FROM EACH BUSHEL USED
2.95

2.90

2.85

2.80

2.75

2.70

2.65
Sep‐14 Jan‐15 May‐15 Sep‐15 Jan‐16 May‐16 Sep‐16 Jan‐17 May‐17 Sep‐17 Jan‐18 May‐18
 Average Corn Belt Ethanol Plant Margins
$2.50

$2.00

$1.50

$1.00

$0.50

$0.00

‐$0.50

‐$1.00

Average Corn Belt Ethanol Prices
$2.40

$2.20

$2.00

$1.80

$1.60

$1.40

$1.20

$1.00
 U.S. GASOLINE STOCKS

270
Current 5-Year Min. 5-Year Max.

250

230
million barrels

210

190

170

150

Source: EIA

DAYS OF GASOLINE SUPPLIES

33 Current Year Prior Year

31

29

27

25

23

21

19

17

15

Source: EIA
 REFINERY CAPACITY UTILIZATION

100 Current Year Prior Year

95

90
per cent

85

80

75

Source: EIA

TOTAL PETROLEUM PRODUCT EXPORTS

7000

6000

5000

4000
thousand barrels per day

3000

2000

1000

Source: EIA
 MIDWEST DIESEL
40000 Stocks Production 1600
1500
35000 1400
thousand barrels

1300

thousand barrels/day
30000 1200
1100
25000 1000
900
20000 800
700
15000 600

Source: EIA
 MID‐CONTINENT DIESEL SEASONAL 
 330
2006‐2013 2017‐2018 2018‐2019

 280

 230
cents/gal

 180

 130

 80
7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5

MID‐CONTINENT DIESEL SEASONAL BASIS
$0.20
2006‐2013 2017‐2018 2018‐2019
$0.15

$0.10

$0.05
cents/gal

$0.00

‐$0.05

‐$0.10

‐$0.15
7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5
 GROUP 3 DIESEL SEASONAL 
330
2008‐2013 2017‐2018 2018‐2019

280

230

180

130

80
7/1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1

GROUP 3 DIESEL SEASONAL BASIS 
$0.15
2008‐2013 2017‐2018 2018‐2019
$0.10

$0.05

$0.00

‐$0.05

‐$0.10

‐$0.15

‐$0.20
7/1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1
 U.S. DIESEL STOCKS

180
Current 5-Year Min. 5-Year Max.

160

140
million barrels

120

100

80

60

40

Source: EIA

DAYS OF DISTILLATE SUPPLIES

65
60
55
50
45
40
35
30
25
20
15

Source: EIA
 ENERGY FUTURES PRICE CURVE Diesel
Crude oil
$72 $2.30

$2.20
$67

$2.10
$62
$2.00
$57
$1.90
Crude oil Diesel
$52
$1.80

$47 $1.70
Sep‐2018 Sep‐2019 Sep‐2020 Sep‐2021

DIESEL SWAPS
Mid‐Continent Group 3
230

225

220

215

210

205

200
 U.S. PROPANE STOCKS

115 Current 5-Year Min. 5-Year Max.

105

95

85
million barrels

75

65

55

45

35

25

Source: EIA

DAYS OF PROPANE SUPPLIES

175
155
135
115
95
75
55
35
15

Source: EIA
 TOTAL PROPANE SUPPLIED (DEMAND)
2500

2000

1500
thousand barrels per day

1000

500

Source: EIA

Spot propane prices

vs Crude oil

$200 Mid-Continent Propane Crude Oil

$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
 Seasonal propane prices
(Mont Belvieu, Texas)
2017-2018
2018 2017 Average
120 66
110
64
100
90 62
80
60
70
60 58
50 56
40
54
30
20 52
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Seasonal propane prices

(Conway, Kansas)
Average
2017
110 Average 2018 2017

100
90
80
70
60
50
40
30
20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
 CME Swaps Curve 
Mont Belvieu, TX wholesale price
$1.10

$1.00

$0.90
per gallon

$0.80

$0.70

$0.60

$0.50
19‐Jun

20‐Jun

21‐Jun

22‐Jun
19‐Mar

20‐Mar

21‐Mar

22‐Mar
18‐Sep

19‐Sep

20‐Sep

21‐Sep

22‐Sep
18‐Dec

19‐Dec

20‐Dec

21‐Dec

22‐Dec
Source: CME Group

CME Swaps Curve 
Conway Kansas wholesale price
$1.05

$0.95

$0.85
per gallon

$0.75

$0.65

$0.55

$0.45

Source: CME Group