Buy 2012 Fuel Needs On Crude Oil Price Break

Buy 2012 Fuel Needs On Crude Oil Price Break

Recently lower fuel prices provide opportunity to book your fall fuel needs ahead.

No one can predict crude oil prices for this summer with a high degree of accuracy, let alone predict retail gasoline and diesel fuel prices. However, all fuels have shown a decline in price recently. A prudent risk management plan would be to book a majority of your fuel needs for this coming fall—including propane for grain drying—at these recently lower prices.

That's how Steve Johnson, Iowa State University Extension farm management specialist in central Iowa, sums up the current situation. However, there is much more to consider, as he points out in the following article.

European money problems, possible trouble in Middle East

The July futures price contract for crude oil shows the recent slide in prices. It indicates a likely downside objective of $85 a barrel, a price level we haven't seen since last October.

Spring is typically a period for renewal and growth, but not for most of the 2012 commodity markets. Since early April these markets have been especially hard-hit by the escalation of the European Economic Union or EU debt crisis.

There is fear that Europe's monetary problems could spread into a worldwide debt contagion. Shaky economic data coming out of the major industrial regions of the world (China, U.S. and the EU) are also bearish for commodity markets.

Commodity market bulls headed into 2012 actually thought this could be a banner year. They had very accommodating world economic monetary policies on their side (inflationary), and world economic growth was improving.

Some market analysts projected that retail U.S. gasoline prices would approach $5 a gallon nationwide this summer, breaking the all-time record high from 2008 of $4.11 per gallon. The July futures contract prices trading on the NYMEX Crude Oil prices for the benchmark West Texas Crude Oil topped $110 a barrel on March 1, 2012.

The July futures price contract for crude oil shows the recent slide in prices. It indicates a likely downside objective of $85 a barrel, a price level we haven't seen since last October.

Steep drop in crude oil prices has occurred this spring

However, a series of factors soon aligned to pressure crude oil prices lower. Those included global economic concerns that decreased demand, rising domestic fuel production (the highest since 1990) and selling by the commodity funds.

By late-May, the nearby July NYMEX Crude Oil contract had lost more than $20 a barrel and hit a fresh 5-month low. The nearby July futures contract chart which accompanies this article indicates a likely downside objective of $85 a barrel, a price level we've not seen since last October. 

According to technical analyst Jim Wyckoff, with this fresh chart damage, traders and investors can now expect nearby crude oil prices to continue to drift lower and soon challenge that solid technical support at the $85 a barrel level. It would take a close above solid technical resistance at the $93.50 level to provide the bulls with fresh upside near-term technical momentum to suggest a market bottom has been put in place.

Summer fuel price forecast: gasoline, diesel may hold steady

As long as market conditions remain basically as they are now, Wally Tyner, an ag economist at Purdue University, forecasts that gasoline prices may hover around the $3.50 to $4 per gallon mark in Indiana this summer. He expects retail diesel fuel prices to be about 25 cents higher than gasoline as reported on Purdue's Ag Answers web page.

The Iowa Department of Agriculture & Land Stewardship, on its website, runs a weekly fuel price survey report. The IDALS survey indicates that for May 2012 in Iowa, retail diesel fuel prices were averaging $3.83 per gallon. That's less than one year ago, when comparable diesel prices averaged $3.96 a gallon. The current Iowa diesel average is $.15 per gallon lower than the national average of $3.98 per gallon.

This is good news for Iowa and U.S. farmers, who will use diesel-powered and gasoline-powered equipment and trucks to harvest millions of acres of crops this summer and fall, and then prepare soils for 2013 crop production.

Take advantage of lower summer fuel prices to meet fall needs

Since most farm fuel and drying needs occur at harvest and during the fall tillage season, many farmers book their fuel and propane ahead. They book it during the summer months in anticipation of higher demand in the fall and seasonal trends that typically see a decrease in price for both types of fuel in the summer. However, Tyner cautions that global economic instability and disruptions in supply could force crude oil prices upward with retail fuel prices to follow.

The political situation in the Middle East and U.S. relations with Iran and Syria will play a large role in what farmers will pay for diesel fuel and gasoline.

Supply also can be interrupted by bad weather, such as hurricanes or tsunamis, or refinery or pipeline outages--all of which can occur domestically or abroad. When supply interruptions do happen, they often temporarily drive prices up until the disruption subsides, Tyner notes.

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If none of these situations occur, prices will remain steady

On the other hand, sluggish economic growth, an increase in crude oil production and higher-than-normal crude oil stocks could continue the downward pressure on futures prices for fuel.

Recent developments in the economic crisis in Greece, Spain and Italy along with an apparent slowdown in China's economy could be important to this summer's fuel prices.

If none of these situations occur, prices will remain steady, Tyner indicates. This could provide an opportunity for farmers to forward contract their fall fuel needs to lock in lower prices.

Conclusion: book your fall fuel needs at recently lower prices

No one can predict crude oil prices for this summer with a high degree of accuracy, let alone retail diesel and gasoline prices. A prudent risk management plan would be to book the majority of your fall fuel needs at these recent lower prices. These would be comparable to those offered last August and September.

Another consideration would be to monitor propane prices this summer. The past two harvests have seen considerable lower demand for propane to dry the corn crop, as the crop matured rapidly with late summer heat and dry weather conditions.

Cash-in on corn price advantage: harvest early, dry the grain

No one knows how rapidly this year's crop will mature, but there is an obvious advantage for harvesting corn early, drying the bushels down in a grain dryer and delivering the corn to market before September 15. Using Central Iowa processor bids for corn, that strategy would have roughly a 50 cent per bushel advantage in the cash bid over that for corn delivered after October 1.

For farm management information and analysis go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.

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