Elizabeth Williams, DTN Special Correspondent
Thu Jun 10, 2010 06:22 AM CDT
INDIANOLA, Iowa (DTN) — Diesel prices are unseasonably low. Fuel market experts advise it’s time for farmers to lock in their summer needs. Demand from a slowly developing U.S. economic recovery and uncertainty in the European economic situation, coupled with a 25 percent increase in supply of distillate fuels (diesel and heating oil) above the five-year average, keeps the lid on diesel prices for now.
“Earlier this spring, we saw optimism running ahead of reality, starting in April and then, in early May, the oil market exploded higher. Heating oil jumped to $2.35 per gallon,” explained Telvent DTN Refined Fuels Editor Brian Milne. “But then the Greek default threat hit the market and by May 25, heating oil declined 22 percent, hitting three-month lows.”
Milne believes the market has more upside risk and recommends diesel buyers lock in their summer needs now. “Even if you do not have any summer diesel needs, I would build some inventory now,” said Milne.
Lewis Adam, physical fuels trader and president of ADMO Energy in Kansas City, is more bearish than Milne, but Adam also recommends buyers lock in some fuel needs now. “Anytime you see a substantial move lower (as we saw in May), buy something. Just don’t buy everything you need,” advised Adam.
Kip Butts, senior commodity analyst with Informa Economics in Memphis, agrees that farmers should cover their diesel needs from now through August or September. “Anytime heating oil futures are under $2 per gallon, you should take a look at the cash market and lock something in,” Butts advised. “But I would wait for the seasonal downtrend we generally see in August and September before locking in your harvest diesel needs.”
DTN Senior Analyst Darin Newsom expects lower prices ahead after seeing an earlier-than-normal seasonal high. DTN’s Six Factor fuel strategy has buyers 100 percent bought through July. “However, I would not be in a hurry to buy anything more right now,” advised Newsom.
“We used to see more local fluctuations in diesel prices, caused by regional supply bottlenecks,” said Milne. “But for more than a year, the local markets have been driven mainly by the broader futures market.”
LOOK AT HEATING OIL FUTURES
Milne explained diesel buyers look at heating oil futures contracts, because the cash sales prices offered at wholesale distribution terminals (the last leg in the wholesale fuel supply chain) closely track the NYMEX heating oil futures spot market. (Heating oil and diesel are both distillate fuels with differing sulfur content.)
“Generally, fuel markets post a rally ahead of the increasing summer demand beginning with Memorial Day and as refiners go off-line for spring maintenance. Then the market falls into mid-June as it waits to re-assess summer demand. Normally, later in the summer, we see a low in the market going into an October rally,” Milne explained.
At this time, the large level of stocks keeps the fuels market in check. “We did see good demand this spring pulled by agriculture, which experienced favorable planting weather. And the trucking industry is showing some increase in demand,” said Milne. “Preliminary numbers show a 17 percent increase in demand for fuel distillates (heating oil and diesel) in May 2010 compared to May 2009.”
From a technical standpoint, “If we take out resistance near $2.10 on heating oil futures spot continuation chart, then we have likely established a short-term low at $1.8368 in May. The contract would then face resistance at $2.1550,” Milne said.
LESS AGREEMENT ON PRICES
Experts see less agreement on where prices go next. Milne is bullish. He said one of the two things he’s looking at are predictions for a very busy hurricane season, especially late in the season from August to October. Expect to see price premiums built into the market as hurricanes develop.
Secondly, there’s uncertainty of how the Gulf oil spill will affect the market. The moratorium on deep water wells will not have an immediate effect on supply. So far, shipping hasn’t been affected. But expected restrictions on drilling, and increased regulations, will raise the cost of producing oil, while limiting what will be recovered, which is long-term bullish, Milne said.
Milne thinks price premiums built into the back-end trading months on heating oil, because of the drilling restrictions, may pull up the nearby months.
What could keep a damper on prices? A robust dollar and a faltering economic recovery.
“However, if the stock market increases, the oil futures market will tag along — expecting economic growth to increase fuel demand. In the U.S., diesel demand correlates with the Gross Domestic Product,” Milne said.
Bearish trader Adam expects anemic demand for oil this summer and adequate supply. “We would need some event, rather than simply supply and demand, to ratchet prices higher,” said Adam. “I don’t think the economic recovery will be strong enough to make a big increase in demand. A hurricane in the Gulf of Mexico would be a market mover. But hurricane forecasts are fraught with error. It’s hard to predict hurricanes two to three months in advance of the season,” Adam said.
How can agricultural producers lower their fuel risk? “Diesel is such a volatile market. If you can justify it for your operation, I’d advise in investing in storage,” said Adam.
“Adjusting inventory is a great way to protect your price risk. Also, having a good hedge program can reduce your risk. But we never allow our clients to speculate in the market,” said Adam. “We strongly advise proper trading and professional help. Don’t trade a market unless you fully understand it,” Adam advised.
Editor’s Note: For a more complete discussion on fuel price outlook for this summer and fall, and how to assess competitive fuel bids, register for DTN’s June 15 “Better Fuel Buying” Webinar at https://about.dtnpf.com/…
Elizabeth Williams can be reached at email@example.com
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Reposted with DTN Permission by Haylie Shipp.