Oil prices held key support after dropping from the highest price level since June 8th on a headline from Oil Price that, “Russia’s Crude Oil Exports Still Higher Than Before It Pledged To Cut”. That headliner caused the oil to fissile from 7238 the highest price since June 8th when an Iran nuclear deal headline caused a similar sell-off. Coincidence? Absolutely. Yet as we move forward, we may have to get a more realistic view of just what condition our condition is in. In one key area of the energy space, we are seeing conditions deteriorate. That is corn and ethanol.
Corn prices are soaring after the USDA reported that the condition of the US corn crop fell 6 points last week. The USDA said that corn was rated 55% good to excellent, down 6 percentage points from 61% the previous week and below last year’s rating at this time of 70%. The current rating is the lowest for the crop for this date since 1988 according to DTN. This comes against a backdrop of reports that ethanol producers are already having problems securing corn and having to pay high prices because inventories of corn are at the lowest level since the 1970s.
According to the Energy Information Administration, ethanol supply is 4 percent below a year ago. Overall ethanol production in the United States averaged 1.018 million barrels per day (bpd), down 18,000 bpd week-on-week and 42,000 bpd, or 4.1%, lower than in the same week last year. Four-week average output at 1.01 million bpd was 36,000 bpd below the same four weeks in 2022. Ethanol RINs and ethanol cash prices were higher.
This potential squeeze comes at a time when the bio-fuel industry is blasting the Biden administration for their bio-fuel mandates. Reuters is reporting, “The Biden administration plans to increase the amount of biofuels that oil refiners must blend into the nation’s fuel mix over the next three years, but the plan includes lower mandates for corn-based ethanol than it had initially proposed, two sources familiar with the matter told Reuters.
The U.S. Environmental Protection Agency plans to finalize biofuel blending volumes at 20.94 billion gallons in 2023, 21.54 billion gallons in 2024, and 22.33 billion gallons in 2025, the sources said. That compares with the initial proposal announced in December of 20.82 billion in 2023, 21.87 billion in 2024, and 22.68 billion in 2025.
“The cut to ethanol drew consternation from the biofuels industry. “If the reports are accurate, EPA’s decision to lower its ambitions for conventional biofuels runs counter to the direction set by Congress and will needlessly slow progress toward this administration’s climate goals,” said Emily Skor, CEO of the biofuels trade association Growth Energy.
Yet it is not just corn that is struggling in the field. The USDA reported that soybeans were rated 54% good to excellent as of Sunday. That’s 5 percentage points lower than last week’s 59%, 14 points below 68% last year at this time and the lowest good-to-excellent rating for the crop for this date since 1996.
This comes as the carryover of grains is at historic lows and if the drought of 2023 turns out to be as bad as some weather models predict, it could be a major disaster. While it is still early and seeds are more reliant than ever. It had better start raining, it won’t just be the cost of ethanol that we will be worried about.
As I mentioned earlier the Oil Price headline on Russia tanked oil. Yes, there were concerns about Chinese oil demand as well, yet it did not stop China from importing a record amount of Russian crude oil. China’s crude oil imports from Russia soared to an all-time high of 2.29 million barrels per day (bpd) in May as refiners in the world’s top crude oil importer continue to buy discounted Russian oil according to Oil Price. But it was the Russian headline that sunk the market. Yet Russia did reduce output. Russia’s crude oil exports by sea fell slightly in the four weeks to June 18th, dropping from 3.66 million bpd to 3.63 million bpd according to Oil Price.
Russia’s diesel exports are also rising but that is a good thing as the EIA is touting that, “U.S. diesel prices have fallen below prices from before Russia’s invasion of Ukraine .” So the EIA must be happy that the sanction on Russian diesel is failing so diesel prices can fall. EIA says that “U.S. ultra-low sulfur diesel front-month futures prices have declined each month since January 2023 and, as of May, averaged $0.50 per gallon (gal) lower than prices in February 2022, just before Russia’s full-scale invasion of Ukraine. For over a year, Russia’s full-scale invasion of Ukraine, and the reaction to it, has disrupted global crude oil and petroleum product markets.” Thanks, Vladimir!
The Saudis imported a record amount of that diesel! Saudi Arabia will import up to 500,000 tonnes (3.7 million barrels) or more of Russian diesel in May, with most of it arriving at Ras Tanura, where one of Saudi Aramco’s refineries is located, two trading sources, Kpler and Refinitiv showed, according to Reuters! Thank you, Pariah State!
Oil and products should get a boost from tonight’s oil inventories. I expect we will see big draws with the possibility that crude supply will fall by 4.2 million barrels. Oil products should fall as well. I expect gasoline will fall by 2.5 million barrels and distillates could fall by as much as 3 million barrels. Even after the SPR released another million barrels of oil last week, I’m not sure exactly how they’re going to break down all of the products but we do believe that we will see a substantial draw across the board this week.
The longer that oil is locked in this very tight trading range the more dangerous the move will be when it finally breaks out either to the upside or the downside. If you think it’s going to break out to the downside you must believe that the economy is getting ready to collapse.
On the flip side, if you believe the economy may hang in there, get ready for some of the tightest supplies we’ve seen in many years later in the year. The grain markets are starting to wake up to the fact that inventories are low and it’ll only be a matter of time before the oil market wakes up to that fact.