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Weekly Energy Review

Wild swings in the Midwest petroleum product market are making fuel buying a tricky chore for producers pushing planting this week who need to top off their storage tanks. The good news is that wholesale prices are down. But a big drop in Midwest diesel stocks last week could create some spot shortages.

Fuel prices soared in April after a big refinery shut for maintenance in Joliet, IL. Mid-continent basis, which is measured off heating oil futures, reached record levels, sending cash prices sharply higher.

Prices have pulled back since, but last week it was the turn of gasoline to soar after stocks tightened. Now, this morning's latest data from the government showed a similar trend for diesel. Utilization rates at Midwest refineries plunged last week, falling from 84.8% of capacity to 79.7%, the lowest rate since the government began breakout out the number three years ago. Fuel stocks in the region dropped 707,000 barrels as a result, despite an increase of 1.6 million barrels nationwide. Midwest refiners focused in increasing gasoline production at the expense of distillate output, which includes diesel and fell 55,000 barrels a day as ag demand stayed strong.

Though flat prices are down, basis remains elevated on seasonal demand. Even the Mid-Continent basis is stronger than average, despite a 30-cent break after its surge earlier this spring.

The big increase in nationwide product output last week caused an unusual pullback in crude oil inventories, which have been running at all-time record levels this spring. That news helped firm a crude oil that looked like it was in some trouble thanks to a sharply stronger dollar. The greenback surged to a 10-month high today, pressuring commodities and sending gold below $1,400 an ounce.

Investors worried about losing purchasing power from a weaker dollar for years have sold the currency and bought commodities as a hedge. The logic of this trade is no longer evident, which could break crude prices down to the $88 level over the next month. Fuel prices should eventually follow suit in June, once ag demand wanes. That would be an opportunity to step up harvest purchases. We previously recommended getting started on fall pricing on the break last month.

We also recommended a 20% purchase earlier on propane for fall drying. The propane swaps market is anticipating steady to lower prices through June, suggesting the market is prepping for the same decline seen a year ago. Last year the cause was the warm winter that left plenty of propane left over. Stocks are tighter this year, though they're starting to build seasonally.

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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.