The Rain on The Grain

They say that rain makes grain, but the lack of rain could cause a spike in oil product prices, states Phil Flynn of PRICE Futures Group.

Big whipsaw moves in gasoline and diesel futures yesterday from sharply lower to sharply higher as the market must assess the potential impact of a drought which at this point has put corn ratings at the lowest level since the drought of 1988, the worst drought since the Dust Bowl, 50 years earlier. While it is too early to say that this drought will be of that magnitude, ethanol, and biofuel prices are not waiting around to find out. Ethanol cash prices surged again as July corn was up 27 1/4 cents at $6.71, while September closed 30 1/2 cents at $6.23 ½. Now the trade is desperately watching the weather to see if there will be enough rain to reduce yields in a market where the carryover of supply is at the lowest levels since the 1970s. The rain on the grain must stay mainly on the plains or get ready to pay more at the pump.

This comes a day after the Biden EPA, much to the dismay of ethanol producers, reduced total corn-ethanol volumes for 2024 and 2025 from the original proposal, setting those volumes at 15 billion gallons for both years reducing it by 250 million gallons. The negative reaction from the industry was loud and is outraged by the Bidens EPA decisions that seem to be based more on politics than on saving the environment.

DTN reported that the Renewable Fuels Association President and CEO Geoff Cooper said EPA’s reduction in the corn-ethanol category of the RFS was “inexplicable and unwarranted. “The RFS was intended to drive continual growth in all categories of renewable fuels well beyond 2022,” Cooper said in a statement. “Instead, today’s final rule flatlines conventional renewable fuels at 15 billion gallons and misses a valuable opportunity to accelerate the energy sector’s transition to low- and zero-carbon fuels. By removing half a billion gallons of lower-carbon, lower-cost fuel, today’s rule needlessly forfeits an opportunity to further enhance US energy security and provide more affordable options at the pump for American drivers.”

Growth Energy CEO Emily Skor said the agency missed an opportunity to reduce carbon emissions in fuels by ignoring corn ethanol’s role. “The RFS remains one of America’s most successful clean energy policies, but, yet again, its full potential as a climate solution remains untapped,” Skor said in a statement. “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. We should be expanding market opportunities for higher blends like E15, not leaving carbon reductions on the table.”

DTN reported that “Although biofuels groups expressed disappointment in the final rule, EPA on Wednesday reiterated the importance of biofuels in reducing carbon. “From day one, EPA has been committed to the growth of renewable fuels that play a critical role in diversifying our country’s energy mix and combatting climate change, all while providing good paying jobs and economic benefits to communities across the country,” EPA Administrator Michael Regan said in a news release. “Today’s final rule reflects our efforts to ensure the stability of the program for years to come, protect consumers from high fuel costs, strengthen the rural economy, support domestic production of cleaner fuels, and help reduce greenhouse gas emissions.”

Yet the industry is not convinced. It seems that on biofuels as well as oil policy, the administration is all over the board with no clear plan. That is what happens when you have politicians setting policy as opposed to people with real knowledge about how the real world works.

Back on the oil front, oil is falling back on recession and a pullback in grains that is handicapping rain chances along with rain totals. A quick sprinkle is not going to be enough to undo the damage to the US crop. China's growth fears are being regurgitated and an American Petroleum Institute (AP!) report was not as bullish as the pre-report whisper number. While the API did report a 1.246 million barrel crude oil draw, more than the 433,00 drop expected, it was not as high as the whisper of a major crude oil draw. We may get that in today’s Energy Information Administration (EIA report) it was still a reason for oil traders to book profit as opposed to following through on the trading range breakout to the upside. Yes, that number should include a 1.7 million barrel reserve release that is about one more release from ending and that could begin the supply drain that unless the economy crashes is more than likely going to start.

UBS today also sees that happening. UBS said that with demand seasonally rising over the coming months they expect larger oil inventory declines to become visible and support oil prices. This comes while UBS says that production cuts by OPEC and member states have dragged OPEC crude exports to a one-year low. Exports are likely to fall further in July as a result of the unilateral Saudi production cut. Overnight it was reported that OPEC is lowering oil exports with Saudi Arabia, UAE, Kuwait, Russia USA seaborne crude exports were down by 1.4MMBpd for May 1 to June 18 vs. April. July 1. The Saudis will cut another 1 million barrels.

One reason US inventories are not falling faster is that China and India are feasting on Russian oil. Reuters says that India’s rising imports of Russian oil hit a record high of about 1.95 million barrels per day (bpd) in May denting purchases from Iraq and Saudi Arabia fell, tanker data from trade and industry sources showed. India, the world’s third-biggest oil consumer, and importer, buys more than 80% of its oil from overseas markets according to Reuters. But Jodi said that India’s total product demand fell by 349 kb/d month-on-month. Interesting.

China imported 9.71 million tonnes of oil from Russia in May, detailed customs data showed, up from 5.4 million tonnes in February 2022 and 6.3 million the following month. The figures show that imports of Russian crude by China since Moscow’s invasion of Ukraine according to Barron’s. So how are those “unprecedented sanctions” against Russia that Joe Biden said, “are devastating their economy and their ability to move forward” working out?

Not only is California losing its population to other more moderate states, but they lost its title to the state with the highest gasoline price. AAA reports that Washington state now holds that title as their prices hit $4.93 a gallon, up 33 cents from the same time a month ago. California’s average price for regular gas is $4.86 a gallon, seven cents cheaper than Washington's. Yet California still holds the title for the most individuals experiencing homelessness with 161,548 individuals on the streets.

Keep an eye on the greens today and also the Energy Information Administration report. The market is still reluctant to go higher as the Federal Reserve continues to suggest that more rate hikes are in store and is still concerned about the Chinese economy, yet we continue to see a significant tightening of crude oil supplies in the coming weeks in the second half of the year. Strategic petroleum reserve releases are coming to an end next week and we will start to see the Biden administration buy oil back. Saudi Arabia will cut production by another million barrels a day. US oil demand is higher than it was a year ago and we will see confirmation of that more than likely in today’s Energy Information Administration report.

Even with the overnight pullback, the market has been making higher highs and higher lows. We closed the above key technical support so we should be looking to buy breaks. The API reported that “Gasoline supply was up 2.935 million and distillates down 301,000.

The power grid in Texas has been challenged by record-high temperatures and is keeping support under the natural gas market. Today we get the natural gas report as well. The Wall Street Journal reports that “natural-gas data due Thursday are expected to show inventories increased last week by an above-average amount as much of the nation except Texas and parts of the South enjoyed mild weather that kept demand levels low. The Energy Information Administration is expected to report that gas in storage rose by 93 billion cubic feet during the week ended June 16, according to the average forecast of 12 analysts, brokers, and traders surveyed by The Wall Street Journal. Estimates range from increases of 88 bcf to 98 bcf. The average forecast compares with a 76-bcf injection for the same week last year, and a five-year average rise of 86 bcf.

The EIA is scheduled to release its natural-gas storage data for the week at 10:30 a.m. ET Thursday. A 93-bcf increase would mean gas stockpiles totaled 2.727 trillion cubic feet, 26% above last year’s total at this time, and 15% above the five-year average for this time of year. Natural-gas inventories were well below normal throughout most of last year amid strong gas-fired heating and cooling demand and production levels that were disrupted several times due to storms and other events. Gas production surged to record highs in early 2023, however, and has stayed at high levels, while demand has suffered this year because of a relatively mild winter and a weak US manufacturing sector. LNG exports have recently softened as well. This has all created a natural-gas inventory surplus and caused prices in futures markets to drop by 43% year to date, to around $2.556/mmBtu.

Learn more about Phil Flynn by visiting Price Futures Group.