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Crude Oil and The Farm Relationship 05/17/2022

Recommendation: Do NOT forward price diesel, gasoline or propane for at least two to three months. Crude oil prices will decline $15 to $20 soon.

If you want the reasons, read on:

We all know diesel, gasoline and propane are refined from crude oil.

Think of refineries as you think of the big meat packing companies. If packers cut production hours or slow the chain speed, less hogs and cattle get killed, the livestock gets backed-up on the farm, resulting in reduced prices for the livestock growers, but on the other side of the packers is the demand for meat. Less slaughter means less meat; less meat means higher beef and pork prices.

Oil production is rapidly expanding. More wells are being drilled every week. More capped wells are being opened every week. The demand for sand to frack oil shale has sand being mined, loaded and shipped 24/7.

Meanwhile, refinery work has slowed and that has caused tight fuel supplies and higher prices with gasoline and diesel fuel higher than ever before. Energy consultant Turner, Mason & Co. said the U.S. refining capacity has fallen by 1.0 million barrels per day (bpd), or about 5% since the beginning of the pandemic. Global refining capacity has shrunk by 2.13 million bpd. U.S. heating oil and diesel fuel supplies were at a 17-year low the week of May 6th.

None-the-less, higher gasoline and diesel, with the exception of three days this past March, are causing crude oil futures to trade higher today than any time since 2008 when crude oil traded to $147.

Inventories of diesel and gasoline have declined seven consecutive quarters (21 months).

Citigroup analysts estimate that China's oil demand is down 1 million bpd from a year ago and that demand is not likely to come back anytime soon. Data Sunday showed China’s April crude oil demand was down 6.7% from a year ago to 12.09 million bpd and China’s April crude oil refining rate was 10% less than April a year ago, down to a 2-year low.

Monday's Chinese economic data shows weakness in China's economy that is bearish for energy demand and crude prices. China’s April industrial production was down 2.9% from a year ago while the market expected an increase of 0.5%. It was the largest decline in 32 years.

China’s April retail sales were 11.1% less than a year ago 4.5% lower than expected, the biggest decline in 2 years. China’s April jobless rate rose +0.3% to a 2-year high of 6.1%, showing a weaker labor market.

Signs of slower economic growth in Europe are bearish for crude demand and prices after the European Commission Monday cut its Eurozone 2022 GDP 1.3% forecast to 2.7% from a February estimate of 4.0%.

Signs that the European Union (EU) is softening its sanctions package against Russia are bearish for crude prices. Bloomberg reported last Monday that the EU would drop a proposed ban on EU-owned vessels transporting Russian oil to third countries.

The amount of crude held worldwide in floating storage on tankers has increased during the week ending May 13th rose by +11% from previous week to a 7-month high.

Last Wednesday's weekly EIA report showed that (1) U.S. crude oil inventories as of May 6 were -13.1% below the seasonal 5-year average, (2) gasoline inventories were -5.9% below the 5-year average, and (3) distillate inventories were -23.2% below the 5-year average. U.S. crude oil production in the week ended May 6 was down 0.8% for the week to 11.8 million bpd, which is 1.3 million bpd below the February 2020 record-high of 13.1 million bpd.

Baker Hughes reported last Friday that active U.S. oil rigs in the week ended May 13 rose by 6 rigs to a new 2-year high of 563. U.S. active oil rigs have risen sharply from the 16½ year low of 172 rigs since Aug 2020, signaling an increase in U.S. crude oil production capacity.


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