How long will diesel price pullback last?

04:35' PM - Thursday, 07/12/2017

Most of the time an eight-million barrel drop in crude oil stocks would be enough to trigger a rally in the petroleum market. But the use of that crude was the real story in the energy trade today, one that sent prices reeling.

Most of those barrels wound up flowing to U.S. refineries, which turned them into gasoline and diesel fuel at a time of year when demand for both is waning. Inventories of those products surged, and demand increased only due to lower imports.

U.S. crude oil production, meanwhile, set another record and slow exports mostly offset lower imports too. As a result it was tough to put a bullish spin on the drop in crude stocks especially with the market already reeling from “buy the rumor, sell the fact” type pressure following last week’s decision by OPEC and its allies to extend production cuts through 2018 if needed to maintain prices.

While crude prices fell 5% from their near 30-month top, wholesale diesel prices in the Midwest are down nearly 10%. And the difference between those cash markets and ULSD futures delivered in New York Harbor continues to weaken seasonally, as it usually does when agriculture demand drops after harvest is finished.

Cash diesel prices and basis normally ease from December into January, though the timing of bottoms varies depending on winter weather and the climate in other markets. It’s not easy to think up scenarios for Middle East violence that could affect crude oil, especially when the U.S. decision on its Israel embassy sparked condemnation around the Arab world.

What happens on Wall Street could further drive money flow. Fund managers bought crude oil hand over fist on the way up. If that money flees with year-end profit-taking or a government shutdown, it could drive prices the other way, setting up a seasonal buying opportunity.

Fundamentals continue to suggest crude oil is fairly priced around $55, which translates into wholesale diesel benchmarks around $1.85, close to where they’re currently trading. A break into winter could take the market to $1.55 -- about $1.95 at the farmgate level -- a place to lock in at least 50% of spring needs.

The pullback in petroleum hasn’t spread all the way through the complex, however. Propane remains near recent highs, supported by forecasts for below normal temperatures in the eastern U.S. through mid-December.

Supply and demand point to average 2018 prices around 75 cents, about 20 cents a gallon below current wholesale benchmarks. A break in crude, especially into spring, could take the market lower though it’s unlikely to get much below the 55-cent wholesale bottom seen in the summer of 2017.

Ethanol lost some of its discount to gasoline this week, but dropped some 2.5% Wednesday after the government reported production surged to a new all-time high last week. That sent socks higher by 500,000 barrel. Still, the new data suggests USDA could be 100 million bushels too low it its forecast of corn usage for the 2017 crop. - -

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