Diesel is not nearly a buyers' market yet, but there were encouraging signs this week that prices are beginning to work lower seasonally. Usage by farmers, the swing factor in fuel demand, is waning with harvest over and the fall application season ending. That's helping to weaken basis, even as futures strength on forecasts for a blast of Arctic air to move into the Midwest this week.
Supplies built last week nationwide, with 2.4 million barrels tacked onto stocks, the biggest build since the early days of harvest. Diesel production in the Midwest actually fell, as refinery problems continue to be seen. Still, inventories in the region were up by 705,000 barrels.
Wholesale diesel prices are still far from a buy, falling only 5 to 7 cents at major benchmarks. But basis against oil futures for ultra-low sulfur diesel in New York, weakened even more, continuing to trade at weaker than normal levels after delivery was switched from heating oil to diesel in May.
While we earlier recommended pricing 25% of spring needs when benchmarks hit $2.815, only the Group 3 pipeline value fell that low. Patience likely will be needed into winter before that target is hit again.
The biggest risk for rising prices now comes from crude oil. News that a pipeline from the storage hub at Cushing, OK to the Gulf will open in January sent crude futures higher earlier this week. The new pipeline could increase U.S. prices, which traded to an $18 discount recently to Brent, the international benchmark. While some oil started moving out of Cushing earlier this year when the Seaway pipeline was reversed, big stocks flowing from Canada and the U.S. were out of position for refineries at the Gulf.
Gains increased Wednesday after the latest inventory showed crude oil supplies down 5.6 million barrels last week. While that was only half the drop seen in the separate tally by the American Petroleum Institute, it was far bigger than analysts had predicted.
Current fundamentals indicate an average price for crude this week at $98.14, putting the market still $1 under-valued. If the rally takes hold after WTI bounced off long-term chart support, a move to $103.46 could be seen into January. Cold weather and international tensions, along with better economic growth, are the fundamental rationale for rallies now.
That same cold forecast firmed propane prices this week, with the market gaining seasonally on heating demand. Swaps show a 13- to 17-cent drop into spring and summer, as supplies rebuild.
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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.
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